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Company: Meta Platforms (META)
Business: Metaplatforms develops technologies that help people find communities and build businesses. The Company's products enable people to connect and share content with friends and family via mobile devices, PCs, virtual reality headsets, wearables and home devices. The company operates in two segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram, Messenger, WhatsApp and other services. RL includes augmented and virtual reality-related consumer hardware, software and content. Facebook enables people to connect, share, discover and communicate with each other on mobile devices and PCs. Instagram is a place where people can express themselves through photos, videos and private messages. Messenger is a messaging application that allows people to connect with friends, family, groups and companies across platforms and devices.
Market value: $1.39 trillion ($554.08 per share)
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Metaplatforms in 2024
Activist: ValueAct Capital
Property: n/a
Average cost: n/a
Comment from activists: ValueAct has been a leading corporate governance investor for over 20 years. ValueAct's directors generally serve on the boards of half of ValueAct's core portfolio holdings and have held 56 directorships at listed companies over 23 years. ValueAct has previously launched activist campaigns at 26 information technology companies, producing an average return of 54.63% versus 30.16% for the Russell 2000 over the same period.
What happens
Behind the scenes
ValueAct has extensive experience in large technology companies, particularly Microsoft and Salesforce. ValueAct CEO Mason Morfit served on Microsoft's board from March 2014 to late 2017 as the tech giant transformed itself into a cloud-based enterprise software company, growing from a $250 billion market cap company to more than $3 trillion today -Dollar rose. As a handful of activists got involved at Salesforce, the company decided to add Morfit to its board on January 27, 2023, and the stock has more than doubled since then.
Now ValueAct has hired another market giant, Meta Platforms, announcing a stake in the company worth around $1 billion. Meta's products enable people to connect and share across various platforms and devices, including mobile devices, PCs, virtual reality headsets, wearables and home devices. The company operates in two segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes social media applications such as Facebook, Instagram, Messenger and WhatsApp, while RL includes augmented and virtual reality-related consumer hardware, software and content. This has been an extremely volatile year for Meta's stock price – with dips below $400 per share and highs above $600 – providing ValueAct with plenty of opportunities to acquire its position at a bargain price. With the share price up about 56% in 2024, ValueAct still sees significant untapped value in Meta.
Meta is expected to generate earnings per share of $30 by 2026, which at a 20x multiple would equate to a company value of about $600 per share. This EPS can be divided into the company's two segments: $40 EPS from the core FoA segment and -$10 EPS from the RL segment. This would put the valuation of Meta's core FoA business at $800 per share, while the RL segment would be valued at -$200 per share, a drag on the company's valuation of $400 billion. This -$10 EPS from the RL segment is made up of -$7 from the RL division and -$3 from AI expenses. ValueAct has shown at Microsoft and Salesforce that it is very effective at helping companies reduce fat and build muscle. There's certainly some fat in the RL department that can be trimmed. While AI spending may be worrisome to some in the market, it may be the muscle that strengthens Meta's core FoA business. AI will benefit many companies, but one of its best applications is creating value in the consumer internet and matching-based business models, monetized by connecting their large audiences with relevant content or services such as Spotify, Indeed.com and Expedia. When AI and GPU computing power is applied to these business models, it can lead to significant improvements in matchmaking and monetization. This is because AI – even generative AI – is ultimately just pattern recognition and pattern recognition, so its application can inherently improve user-product matching and preference targeting. Meta, in its core FoA business, can be one of the biggest beneficiaries of this market when it comes to content delivery and advertising optimization. The second lever of AI growth for Meta is the impact of the way developers use large language models (LLMs) to build technologies. Developers are increasingly using multiple LLMs within the same project and are therefore relying on tools that enable different models to work together. Companies currently led by OpenAI and Microsoft are competing for control of the tools used to layer these LLMs necessary to operate and develop new technologies. To enter this market, Mark Zuckerberg open-sourced Meta's “LLaMA” model, a high-performance AI model intended to compete with OpenAI's GPT and Microsoft's Copilot. The decision to open source LLaMa has helped strengthen Meta's role in the AI ecosystem by driving the adoption of LLaMA. It should more than justify Meta's AI spending. So if Meta continues to bleed the RL division at the same rate and gets no benefit at all from its AI spending, the stock will be at $600 a share in 2026. However, if ValueAct can do what it was able to do with Microsoft and Salesforce, Adobe, and others – help build muscle and reduce fat – RLs – $7 should drop significantly and AIs – $3 will be money well spent and represent a significant value creator, as opposed to a loss of value as the market indicates today. Even a neutral rating ($0 EPS) for RL/AI would value Meta at $800 per share, representing 40% growth from the current price. And if the AI outlook turns positive, which seems very plausible given these potential growth opportunities, RL/AI should actually contribute to EPS growth. Thus, 40% growth almost becomes a floor, highlighting the significant upside potential for meta.
This does not mean that ValueAct is putting out a “flyer” on the topic of AI. First of all, ValueAct is a very prudent and careful investor and does not accept “flyers”. Second, ValueAct has extensive experience on both sides of AI. The company has had a presence in the boardrooms of companies like Microsoft and Salesforce, two of the largest AI developers. And the company has been an active shareholder in companies such as Spotify, The New York Times, Expedia and Recruit (Indeed.com), which are among the largest users and beneficiaries of AI. So when ValueAct invests in AI, it's not just nonsense. The company understands AI thoroughly and how its customers can use it.
As we think about how ValueAct will approach this engagement going forward, we must confront the elephant in the room: Meta is a controlled company, with Mark Zuckerberg holding approximately 61% of the company's voting rights. While most activists would never engage with a controlled company for obvious reasons, ValueAct actually has a strong track record of creating value with controlled or quasi-controlled companies, including engagements with Martha Stewart Living, The New York Times, 21st Century Fox , Spotify and other KKR. In these situations, ValueAct achieved an average return of 124.12%, compared to an average of 30.79% for the relevant market benchmark. This is because ValueAct understands that activism is about the power of the idea; the force of the argument; the power of conviction. Even when investing in uncontrolled companies, the company almost always only takes a seat on the board because it is convinced that its ideas will be well received. However, given Meta's controlled structure, we do not expect ValueAct to push for a board seat here as strongly as with other portfolio companies. In a controlled company, you can be almost as effective as an active shareholder as you can be as a director. However, given ValueAct's track record on the board, particularly with other mega-cap technology companies, shareholders would be wise to have Meta add a ValueAct representative to the board.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.