Meta misses, but we still like it; Bill Ackman Scored on Pandemic Shutdown and Bounceback; Leon Cooperman: The moral calculations of a billionaire; Dancing robots

1) Social media giant Meta Platforms (FB), which owns Facebook, Messenger, Instagram, WhatsApp, and Oculus, reported disappointing earnings after the close yesterday (press release here and slides here). The stock is getting hammered today and has now lost a third of its value since it hit an all-time high in September.

Fourth-quarter revenues and earnings missed analysts' expectations, as did revenue guidance for the first quarter of this year.

A major headwind that is spooking investors is the company's enormous investment in the metaverse, which only generated $2.3 billion in revenue last year yet accounted for $10.2 billion in operating losses. As a result, total operating income was 18% lower than it otherwise would have been, falling from $56.9 billion generated by Meta's "Family of Apps" to the reported $46.8 billion.

We are very bullish on the metaverse and think this investment will pay off, but this might not become clear to investors for quite some time. And it's spooking some employees as well, as this story in yesterday's New York Times highlights: How Facebook Is Morphing Into Meta. Excerpt:

Mark Zuckerberg, the founder and chief executive of the company formerly known as Facebook, has upended his company ever since he announced in October that he was betting on the so-called metaverse. Under this idea, his company – renamed Meta – would introduce people to shared virtual worlds and experiences across different software and hardware platforms.

Since then, Meta has pursued a sweeping transformation, current and former employees said. It has created thousands of new jobs in the labs that make hardware and software for the metaverse. Managers have urged employees who worked on social networking products to apply for those augmented reality and virtual reality roles. The company has poached metaverse engineers from rivals including Microsoft (MSFT) and Apple (AAPL). And it has officially rebranded some products, like its Oculus virtual-reality headsets, with the Meta name.

The moves amount to some of the most drastic changes at the Silicon Valley company since 2012, when Mr. Zuckerberg announced that Facebook had to shift its social network away from desktop computers and toward mobile devices. The company restructured, focusing its energy and resources on making mobile-friendly versions of its products. The makeover was hugely successful, leading to years of growth.

But changing the company's course now is far more challenging. Meta has more than 68,000 employees, more than 14 times its size in 2012. Its market value has risen by more than eight times over that period to $840 billion. Its business is entrenched in online advertising and social networking. And while the shift may give Meta a head start on the internet's next phase, the metaverse remains a largely theoretical concept – unlike the 2012 move to mobile, when smartphones were already widely used.

The result has been internal disruption, according to nine current and former Meta employees, who were not authorized to speak publicly. While some workers were excited about Meta's pivot, others questioned whether the company was hurtling into a new product without fixing issues such as misinformation and extremism on its social platforms. Workers were expected to adopt a positive attitude toward innovation or leave, one employee said, and some who disagreed with the new mission have departed.

It's easy to forget amid the near-term uncertainty that Meta remains one of the greatest businesses of all time. Keep in mind that 3.6 billion people – a staggering 61% of all people aged 15 and older on the planet – use one of Meta's services every month, up 9% year over year in the fourth quarter.

This growth, combined with higher revenue per user in every geographic segment, translated into 20% revenue growth, an operating margin of 37%, and free cash flow hitting a record $12.6 billion in the fourth quarter, up 36% year over year.

Investors also appear to be missing Meta's booming share repurchases, as you can see in this chart:

The company has $39 billion available and authorized for additional repurchases – and I have no doubt that it will do much more than this over the remainder of this year.

In summary, thanks to near-term headwinds and uncertainty, you can own the stock of one of the greatest businesses of all time for a below-market price-to-earnings multiple of roughly 18 times this year's estimates. That's why this stock remains a core holding in both our Empire Stock Investor and Empire Investment Report newsletters.

2) Kudos to my old friend Bill Ackman of Pershing Square Capital Management...

He not only made a fortune – in what William Cohan in Barron's called "the greatest trade of all time," turning $27 million into $2.6 billion in a matter of weeks – correctly anticipating how bad the pandemic would get, but he did it again last year, betting that a strong economic recovery would lead to rising inflation and interest rates. This recent front-page story in the Wall Street Journal has the details: Bill Ackman Scored on Pandemic Shutdown and Bounceback. Excerpt:

The world looked different by the end of 2020. Vaccines were coming. Consumers were weary of lockdowns and flush with savings after a year of government stimulus and nowhere to spend it.

The Federal Reserve had kept interest rates near zero since the start of the pandemic to keep credit flowing and protect the economy. But Mr. Ackman assumed the reopening would unleash a flood of consumer spending, sparking inflation not seen for decades and forcing the Fed to intervene. (Higher interest rates can cool an overheated economy by making borrowing more expensive.)

So he spent $177 million on options tied to Treasury bonds that would pay off if interest rates rose significantly over the next 18 months, according to investor documents and people familiar with the matter. By late March, the investment had more than tripled in value. By the fall, concerns about inflation had gripped Wall Street and the position kept rising...

On Wednesday, the Fed signaled it would begin raising interest rates in March, the first of what analysts expect to be as many as seven increases over the next year or so.

But Mr. Ackman had already made his money. Pershing Square had started selling its position in the preceding days and was already out by the time Fed Chairman Jerome Powell took the podium, with $1.25 billion in profits. Mr. Ackman plowed most of the money into a stake in Netflix (NFLX), returning to his stock-picking roots.

He invested the rest in a new, smaller bet that interest rates will keep going up.

3) Speaking of old friends who are billionaires, this is a super interesting article in the Washington Post by Pulitzer Prize-winning journalist Eli Saslow about retired hedge fund legend Leon Cooperman: The moral calculations of a billionaire. Excerpt:

He responded to most of the personal e-mails, kept record of the occasional death threats and wrote letters to politicians such as Sen. Elizabeth Warren (D-MA), Sen. Bernie Sanders (I-VT) and Rep. Alexandria Ocasio-Cortez (D-NY) whenever they criticized billionaires in their speeches, because he couldn't understand: What exactly had he done wrong? What rule had he broken?

He'd been born to poor immigrant parents on the losing end of a capitalist economy. He'd attended public schools, taken on debt to become the first in his family to attend college, worked 80-hour weeks, made smart decisions, benefited from some good luck, amassed a fortune for himself and for his clients and paid hundreds of millions in taxes to the government. He had a wife of 57 years, two successful children, and three grandchildren who were helping him decide how to give most of his money away to a long list of charities.

"My life is the story of the American Dream," he'd said while accepting an award at one charity gala, and he'd always imagined himself as the rags-to-riches hero, only to now find himself cast as the greedy villain in a story of economic inequality run amok. ...

"It's not exactly a fair system until you even up the odds," he said, and after looking over the list of worthy causes, he and Toby had decided that donating half of their money didn't feel sufficient. Sixty percent wasn't enough to meet the country's needs. Neither was 75%. So they'd agreed to set up a family foundation that would eventually give away more than 90% of their money, and Cooperman had decided that rather than retiring in earnest, he would continue to manage their account so there would be more to give away.

"He who dies rich dies disgraced," read a quotation attributed to Andrew Carnegie on Cooperman's office desk, but on this day he was still rich and getting richer. "What's enough?" he wondered. "What's the answer?" He checked the stock graph on his screen – up $2.6 million in the past five hours. His accounts were equal to the average net worth of 23,000 middle-class American families...

Cooperman believed most of all in the basic tenets of capitalism. He'd earned his money, and therefore it was his to spend or give away. He sent in a quarterly check for $10 million to the federal government in estimated taxes and said he paid an effective tax rate of 34%. He'd told politicians in his letters that he was willing to pay more, but he believed the highest effective tax rate should be no more than 50%.

"What made America great is our system of capitalism, incentivizing work and effort and ingenuity," he'd written. "Capitalism has flaws, but socialism has no benefits. Why not spread my work ethic instead of just my wealth?"

My quick thoughts: I think it's idiotic to demonize billionaires. I know more than a dozen well, and all of them earned their money through hard work, determination, and, yes, a lot of good fortune, and all are very philanthropic.

But I think it's equally idiotic to cry "socialism" and dismiss discussions of changing our tax system such that the 745 American billionaires, "whose cumulative wealth has grown by an estimated 70% since the beginning of the pandemic" and who are "now worth more than the bottom 60% of American households combined," to pay more in taxes.

4) The robots of Boston Dynamics, whose three-minute video dancing to the classic song "Do You Love Me?" went viral at the end of 2020, with nearly 36 million views to date, are back, dancing to BTS' "IONIQ: I'm On It" on The Tonight Show Starring Jimmy Fallon. Trust me, it will put both a smile and a look of amazement on your face!

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.