Activist ValueAct is poised to trim fat, help boost profits at Meta. Here’s how
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Company: Meta Platforms (META)
Business: Meta Platforms builds 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 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 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)
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Meta Platforms in 2024
Ownership: n/a
Average Cost: n/a
Activist Commentary: ValueAct has been a premier corporate governance investor for over 20 years. ValueAct principals are generally on the boards of half of ValueAct’s core portfolio positions and have had 56 public company board seats over 23 years. ValueAct has previously commenced activist campaigns at 26 information technology companies and has had an average return of 54.63% versus 30.16% for the Russell 2000 over the same period.
What’s happeningBehind the scenes
ValueAct has extensive experience in mega-cap technology companies, most notably Microsoft and Salesforce. ValueAct CEO Mason Morfit was on the board of Microsoft from March 2014 through the end of 2017 as the tech giant transformed into a cloud-based enterprise software business and went from a $250 billion market cap company to more than $3 trillion today. At Salesforce, when a handful of activists were engaging, the company opted to add Morfit to its board on Jan. 27, 2023, and the stock has more than doubled since then.
Now, ValueAct has engaged another titan of the market, Meta Platforms, announcing an approximately $1 billion dollar position in the company. Meta’s products enable people to connect and share through various platforms and devices, including mobile devices, personal computers, virtual reality headsets, wearables, and in-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 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 — giving ValueAct many opportunities to acquire its position at a favorable price. With the stock price up about 56% in 2024, ValueAct still sees significant untapped value in Meta.
Meta is expected to deliver $30 in EPS by 2026, which at a 20-times multiple would put the company at approximately $600 per share. This EPS can be broken down into the company’s two segments: $40 EPS from its core FoA segment and -$10 EPS from the RL segment. This would place the valuation of 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 valuation. This -$10 EPS from the RL segment is made up of -$7 from the RL division and -$3 from AI spending. ValueAct has shown at Microsoft and Salesforce that it is very good in helping companies trim fat and build muscle. There is certainly some fat in the RL division that can be trimmed. The AI spending, while concerning to some in the market, can be the muscle that strengthens Meta’s core FoA business. AI will provide benefits to many companies, but one of its best uses is to create value in consumer internet and matching-based business models that are monetized by connecting their vast audiences to relevant content or services, such as such as Spotify, Indeed.com and Expedia. When AI and GPU computing power are applied to these business models, it can lead to significant improvements in matchmaking and monetization. This is because at the end of the day, AI – even generative AI – is just pattern spotting and pattern recognition, so its application can inherently enhance user-product matching and preference alignment. Meta can be one of the biggest beneficiaries of this market in its core FoA business with respect to delivering content and optimizing advertising. The second lever for AI growth for Meta is the impact of how developers are using large language models (LLMs) to create technologies. Developers are increasingly using multiple LLMs within the same 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 run 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 build Meta’s role in the AI ecosystem by driving LLaMA adoption. It should more than justify Meta’s AI spend. So, if Meta continues to bleed the RL division at the same pace and gets absolutely no value from its AI spend, it will have a $600 stock in 2026. However, if ValueAct can do what it has been able to do at Microsoft, Salesforce, Adobe and others – help grow the muscle and trim the fat – RL’s -$7 should decline substantially and AI’s -$3 will be money well spent and be a significant value creator, as opposed to a drain on value as the market attributes today. Even a neutral valuation ($0 EPS) for RL/AI would place Meta at $800 per share, implying 40% growth from its current price. And if AI prospects become positive, which seems very plausible given these potential avenues of growth, RL/AI should actually contribute to EPS growth. Thus, 40% growth almost becomes a floor that underscores the significant upside for Meta.
This is not ValueAct taking a “flyer” on AI. First of all, ValueAct is a very thoughtful and diligent investor and doesn’t take “flyers.” Second, ValueAct has extensive experience from both sides of AI. The firm has been in the boardroom at companies like Microsoft and Salesforce, two of the largest developers of AI. And the firm has been an active shareholder at companies like Spotify, The New York Times, Expedia and Recruit (Indeed.com) some of the largest users and beneficiaries of AI. So, when ValueAct invests in AI, it isn’t just spit balling. The firm thoroughly understands AI and how its customers can use it.
When 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 activists would never bother with a controlled company for obvious reasons, ValueAct actually has a strong track record of creating value at controlled or quasi-controlled companies, including engagements at Martha Stewart Living, The New York Times, 21st Century Fox, Spotify and KKR. In these situations, ValueAct averaged a 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 power of the argument; the power of persuasion. As such, even in its investments in non-controlled companies, the firm almost always only takes one board seat because it is confident that its ideas will resonate. However, given Meta’s controlled structure, we don’t expect ValueAct to push as hard for a board seat here as it might at other portfolio companies. In a controlled company you can almost be as effective as an active shareholder as you can as a director. That being said, given ValueAct’s track record of board success, particularly at other mega-cap technology companies, shareholders would be well served if Meta added 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, a mutual fund that invests in a portfolio of activist 13D investments.
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