The Activist Value Act is poised to trim the fat, helping to increase profits on the meta. Here’s how

Business: Meta platforms Creates technologies that help people find communities and grow businesses. The company’s products enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, wearables and in-home devices. The company operates through two divisions: Family of Apps (FoA) and Reality Labs (RL). FoA includes Facebook, Instagram, Messenger, WhatsApp and other services. RL includes consumer hardware, software and content related to augmented and virtual reality. Facebook enables people to connect, share, discover and communicate with each other on mobile devices and personal computers. Instagram is a place where people can express themselves through photos, videos and private messaging. Messenger is a messaging application for people to connect with friends, family, groups and businesses across platforms and devices.

Stock market value: $1.39T ($554.08 per share)

Ownership: n/a

Average cost: n/a

Worker Commentary: Value Act has been a leading corporate governance investor for over 20 years. ValueAct principals are typically on the boards of about half of ValueAct’s core portfolio positions and have held 56 public company board seats over 23 years. Value Act has previously launched activist campaigns in 26 information technology companies and has averaged a return of 54.63 percent over the same period, compared to 30.16 percent for the Russell 2000.

Value Act has extensive experience at megacap technology companies, notably Microsoft and Salesforce. ValueAct CEO Mason Morfit was on Microsoft’s board from March 2014 until late 2017 as the tech giant transformed into a cloud-based enterprise software business and grew from a $250 billion market cap company to more than $3 trillion today. At Salesforce, while a handful of employees were engaged, the company elected to add Morphett to its board on January 27, 2023, and the stock has doubled since then.

Now, ValueAct has added another market titan, Meta Platforms, which announced a nearly $1 billion position in the company. Meta’s products enable people to connect and share across a variety of platforms and devices, including mobile devices, personal computers, virtual reality headsets, wearables, and in-home devices. The company operates through two divisions: 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 a very volatile year for Meta’s stock price — with lows below $400 per share and highs above $600 — giving ValueAct plenty of opportunities to get its position at a reasonable price. With the stock expected to rise nearly 56% in 2024, ValueAct still sees considerable untapped value in the meta.

Meta is expected to deliver $30 in EPS by 2026, which at a 20 times multiple would put the company at about $600 per share. This EPS can be divided into two parts of the company: $40 EPS from its core FoA segment and -$10 EPS from the RL segment. That would value Meta’s core FoA business at $800 per share, while its RL segment would be valued at -$200 per share, or a $400 billion drain on the company’s value. This -$10 EPS from the RL segment is comprised of -$7 from the RL division and -$3 from AI expenses. ValueAct has shown at Microsoft and Salesforce that it’s great at helping companies trim fat and build muscle. The RL division definitely has some fat that could be trimmed. AI spending, while for some in the market, may be the muscle that strengthens Meta’s core FoA business. AI will bring benefits to many companies, but one of its best uses is to create value in the consumer internet and in similarity-based business models by connecting a broad audience to relevant content or services, such as Spotify, Indeed.com is monetized. and Expedia. When AI and GPU computing power are applied to these business models, it can lead to significant improvements in matchmaking and monetization. That’s because at the end of the day, AI – even creative AI – is just pattern spotting and pattern recognition, so its application can naturally increase user product matching and preference alignment. Meta could be one of the biggest beneficiaries of this market in its core FoA business of optimizing content delivery and advertising. Another lever of AI growth for Meta is the impact of how developers are using large language models (LLMs) to build technologies. Developers are increasingly using multiple LLMs within a single project, so they rely on tools that enable different models to work together. Currently led by OpenAI and Microsoft, companies are competing to control the tools used to layer these LLMs, which are necessary to drive and develop new technologies. To enter this market, Mark Zuckerberg has open-sourced Meta’s “LLaMA” model, a high-performance AI model designed to compete with OpenAI’s GPT and Microsoft’s Copilot. The decision to open source LLaMa has helped shape the role of meta in the AI ​​ecosystem through the adoption of LLaMa. That should more than justify the AI ​​costs of the meta. So, if Meta continues to bleed into the RL division at the same pace and captures absolutely no value from its AI spend, it will have a $600 stock in 2026. However, if ValueAct can do what it can do at Microsoft, Salesforce. , Adobe and others – help build muscle and trim fat – RL’s -$7 should be considerably lower and AI’s -$3 bucks. Spent well and be a significant value creator, as opposed to depreciating according to market characteristics today. Even a neutral valuation ($0 EPS) for RL/AI would put Meta at $800 per share, implying 40% growth from its current price. And if AI prospects turn positive, which seems very plausible given these potential growth paths, then RL/AI should actually contribute to EPS growth. Thus, 40% growth becomes roughly the threshold that defines significant improvement for Meta.

This is not ValueAct taking a “flyer” on AI. First, ValueAct is a very thoughtful and diligent investor and does not take “flyers”. Second, ValueAct has extensive experience on both sides of AI. The firm is in the boardroom of companies like Microsoft and Salesforce, two of the biggest developers of AI. And the firm has been an active shareholder in companies like Spotify, The New York Times, Expedia and Recruit (Indeed.com), among the biggest users and beneficiaries of AI. So, when ValueAct invests in AI, it’s not just spit. The firm understands AI well and how its customers can use it.

In thinking about how ValueAct will approach this engagement going forward, we must address the elephant in the room: Meta is a controlled company, with Mark Zuckerberg holding approximately 61% of the company’s voting power. While most workers would never bother with a controlled company for obvious reasons, the Value Act actually has a strong track record of creating value in controlled or quasi-controlled companies, including Martha Stewart Living, The New York Times. , 21st Century Fox, Spotify and KKR In these conditions, ValueAct returned an average of 124.12% compared to an average of 30.79% for the respective market benchmark. This is because Value Act understands that activism is about the power of ideas. force of argument; The power of persuasion. Thus, even in its investments in non-controlled companies, the firm almost always takes only one board seat because it believes its ideas will resonate. However, given Meta’s controlled structure, we don’t expect Value Act to push for a board seat here as much as it might at other portfolio companies. In a controlled company you can be almost as effective as an active shareholder as you can be as a director. That being said, given ValueAct’s track record of board success, particularly among other mega-cap technology companies, shareholders would be well served if Meta added a ValueAct representative to the board.

Ken Square 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 a portfolio of activist 13D investments. is