Activist ValueAct is ready to cut the fat and help boost Meta’s bottom line. The method is as follows | Real Time Headlines

Business: meta platform Develop technology that helps people find community and grow businesses. The company’s products enable people to connect and share with friends and family across mobile devices, PCs, virtual reality headsets, wearables and home devices. The company operates through two segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes services such as Facebook, Instagram, Messenger, WhatsApp, etc. Reinforcement learning includes consumer hardware, software and content related to augmented reality and virtual reality. Facebook enables people to connect, share, discover and communicate with each other on their mobile devices and personal computers. Instagram is a place where people can express themselves through photos, videos, and private messages. Messenger is a messaging app that lets people connect with friends, family, groups, and businesses across platforms and devices.

Stock market capitalization: US$1.39T (US$554.08 per share)

ValueAct has extensive experience with large technology companies, particularly Microsoft and Salesforce. ValueAct CEO Mason Morfit is a former Microsoft board member March 2014 through end of 2017 The tech giant transformed into a cloud-based enterprise software business and grew from a $250 billion company to a market capitalization of more than $3 trillion today. At Salesforce, when a handful of activists get involved, the company chooses Adds Morfit to its board of directors on January 27, 2023, and the stock has more than doubled since then.

Now, ValueAct has partnered with another marketplace giant, Meta Platforms, and announced an approximately $1 billion stake in the company. Meta’s products enable people to connect and share across a variety of platforms and devices, including mobile devices, PCs, virtual reality headsets, wearables and home devices. The company operates through 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 consumer hardware, software and content related to augmented and virtual reality. It’s been an extremely volatile year for Meta’s stock price – falling below $400 a share and highs over $600 – giving ValueAct plenty of opportunities to acquire its position at a favorable price. With shares up roughly 56% in 2024, ValueAct still believes there is plenty of untapped value in Meta.

Meta expects earnings to hit $30 per share by 2026, which at 20x puts the company at about $600 per share. This EPS can be divided into two parts of the company: $40 per share for the core FoA part and $10 per share for the RL part. This would value Meta’s core FoA business at $800 per share and its RL business at -$200 per share, a loss of $400 billion in company valuation. This -$10 EPS for the RL segment was made up of -$7 for the RL segment and -$3 for the AI ​​segment. ValueAct has proven at Microsoft and Salesforce that it is very good at helping companies lose fat and gain muscle. The RL department does have some excess that could be cut. Spending on artificial intelligence, while worrying some in the market, could be a force that strengthens Meta’s core FoA business. Artificial intelligence will benefit many companies, but one of its best uses is creating value in the consumer internet and match-based business models that monetize by connecting broad audiences to relevant content or services. Examples include Spotify, Indeed.com and Expedia. When artificial intelligence and GPU computing power are applied to these business models, it can bring significant improvements in matching and monetization. That’s because at the end of the day, AI—even generative AI—is just pattern discovery and pattern recognition, so its application can inherently enhance user-product matching and preference alignment. Meta’s core FoA business is likely to be one of the biggest beneficiaries of this market, in terms of delivering content and optimizing advertising. Meta The second lever for the growth of artificial intelligence is how developers use large language models (LLMs) to create the impact of the technology. Developers are increasingly working with multiple LLMs on the same project, so they rely on tools that enable different models to work together. Currently, companies led by OpenAI and Microsoft are racing to control the tools used to layer these LLMs, which are necessary to run and develop new technologies. In order to enter this market, Mark Zuckerberg open sourced Meta’s “LLaMA” model, which is a high-performance artificial intelligence model aim to compete Together with OpenAI’s GPT and Microsoft’s Copilot. The decision to open source LLaMa drove LLaMA’s adoption and helped establish Meta’s place in the artificial intelligence ecosystem. It should more than just justify Meta’s AI spending. So if Meta continues to bleed the RL division at the same rate and gets absolutely no value from its AI spending, its stock will hit $600 by 2026. What Salesforce can do, Adobe and others – help build muscle and lose fat – RL’s – $7 should drop significantly, while AI’s – $3 will be money well spent and be a significant value creator, not Value is being depleted as the market sees it today. Even at a neutral valuation of RL/AI (earnings of $0 per share), Meta’s share price would be $800 per share, which would represent a 40% increase from its current price. If the AI ​​outlook turns positive (which seems very reasonable given these potential growth avenues), then RL/AI should actually help EPS growth. Therefore, 40% growth is almost the bottom line that highlights Meta’s significant upside.

This is not ValueAct putting a “leaflet” on artificial intelligence. First of all, ValueAct is a very thoughtful and diligent investor and does not accept “flyers”. Second, ValueAct has extensive experience on both sides of artificial intelligence. The company has been on the boards of Microsoft and Salesforce, two of the largest developers of artificial intelligence. The company has been an active shareholder in such companies Spotify, new york times, Expedia and Recruit (Indeed.com) Some of the biggest users and beneficiaries of artificial intelligence. So when ValueAct invests in artificial intelligence, it’s not just complaining. The company thoroughly understands artificial intelligence and how its customers use it.

When considering how ValueAct will handle this involvement going forward, we have to address the elephant in the room: Meta is a controlled corporation, in which Mark Zuckerberg holds approximately 61% of the voting rights. While most activists would never bother with controlled companies for obvious reasons, ValueAct actually has a strong track record of creating value for controlled or semi-controlled companies, including involvement with Martha Stewart Living, The New York Times, 21st Century Fox Corporation, Spotify and KKR. Under these circumstances, ValueAct’s average return was 124.12%, compared with the relevant market benchmark’s average return of 30.79%. That’s because ValueAct understands that activism is about the power of ideas; the power of argument; the power of persuasion. So even in investments in non-controlled companies, the company almost always only takes a board seat because it believes its ideas will resonate. However, given Meta’s controlled structure, we don’t expect ValueAct to push hard for a board seat like it does at other portfolio companies. In a controlled company, you can be almost as effective as an active shareholder as a director. That being said, given ValueAct’s board’s track record of success, especially at other large tech companies, shareholders would be well served if Meta added a ValueAct representative to its 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, a mutual fund that invests in activist 13D portfolios.