Mark Zuckerberg's big bet on the metaverse has lost the confidence of Wall Street. Photo / Getty Images
Some of Meta’s biggest shareholders have lined up to vent their anger at the social media company’s management after it stunned Wall Street with plans to ramp up its loss-making effort to build the metaverse.
Even after a slide that has wiped 74 per cent from Meta’s stock price in little over a year, however, investors and boardroom experts said there was little outsiders could do to prevent chief executive Mark Zuckerberg using his majority control to plough ahead with a bet that has lost the confidence of Wall Street.
Meta’s shares tumbled 25 per cent on Thursday (Friday NZT) after the company revealed that losses from Reality Labs, its division that is building the metaverse, would grow “significantly” in 2023, after reaching US$9.4 billion (NZ$16.1b) in the first nine months of this year. Investors were also startled by another jump in capital spending that Meta said would consume as much as US$39b next year, more than double the level of 2021.
“If any other company had done this you’d have activist investors writing letters, proposing alternative slates of directors, demanding change,” said Jim Tierney, chief investment officer for US growth at AllianceBernstein, a Meta shareholder. “I think Mark heard crystal clear what investors wanted. He’s made his decision.”
The anger has spilled over into meetings with management, some of which Zuckerberg has attended personally since Meta shocked Wall Street with its spending plans late on Wednesday.
“It does seem like there’s a sense of frustration” among investors over the company’s ballooning costs, said one person familiar with the discussions.
Referring to the series of informal follow-up calls with investors after the company announced earnings late on Wednesday, Tierney said: “When people had callbacks with the company they got more disgusted, not less disgusted.”
“Zuckerberg was tone-deaf to the investment community, doubling down on everything,” said David Older, head of equities at €33.2b (NZ$65.4b) asset manager Carmignac, which has holdings in Amazon, Microsoft and Google but not Meta. “The timeline for the metaverse is very stretched. I don’t think you’re going to know if it is the right move for five or 10 years.”
Asked what impact the shareholder unhappiness would have on its plans, Meta said: “We value the opinions of our investors and regularly engage with them to ensure we’re aware of their respective perspectives.”
Like many companies, Meta regularly holds meetings in the days after it reports quarterly earnings, even though Zuckerberg’s full personal control means he can ignore their views. The Meta co-founder owns 13 per cent of the equity in the company but controls 54.4 per cent of the votes through a special class of shares.
Meta would not comment on whether the complaints had led to any renewed discussion inside the company about the scale of its spending. It said: “Meta’s management team, with oversight from the Board of Directors, is focused on executing on the company’s key priorities with an eye toward creating long-term shareholder value.”
Shareholder frustration at Zuckerberg’s personal control over Meta has crept up in recent years as the company has found itself at the centre of repeated controversies over misinformation and privacy, and as it has bet big on the metaverse. A shareholder proposal to scrap the supervoting shares received 28 per cent of votes at Meta’s annual shareholder meeting earlier this year, despite Zuckerberg’s majority stake. That was up from the 17 per cent support a similar proposal received in 2014.
Legally, Meta’s directors have a responsibility to represent all shareholders, even if the chief executive controls who is elected to the board, said Steve Diamond, a corporate governance expert at Santa Clara University School of Law. A court can intervene on behalf of shareholders if a board is found to have engaged in “waste” of the company’s resources, though that is “a very high standard to meet” and has almost never been upheld, he added.
“I’m astounded by how much they have already spent [on the metaverse] and they have little to show for it,” said Diamond. “If this was any other CEO who had only a 1 per cent stake, he’d probably be gone.”
The lack of any formal avenues to change the company’s direction has forced would-be shareholder activists to take a conciliatory approach. In an open letter to Meta directors shortly before the latest earnings last week, Brad Gerstner, of Altimeter Capital, resorted to flattery to try to get the chief executive’s attention. He complimented Meta’s business, before urging the company to cut at least 20 per cent of its staff, slice US$5b from its capital expenditures and cap its annual spending on the metaverse at US$5b.
“Everyone agreed with Brad Gerstner’s open letter to Zuckerberg,” said Carmignac’s Older. “You can have a great stock and still invest $5b a year in the metaverse but you’ve got to be disciplined on costs and be disciplined about how you’re investing.”
In a call with analysts on Wednesday, Meta executives tried to head off the unrest by pointing out that 82 per cent of the company’s spending in the latest quarter was on its existing services, rather than the metaverse.
Some tech investors said Zuckerberg might be justified in pushing aggressively, given the scale of the risk his company is facing. Apple’s move to limit the data that its apps can collect on its devices severely dented Meta’s advertising revenue and appeared to have convinced the Meta chief that he had no choice but to go all-in on trying to build the next important computing platform, said Kevin Landis, at Firsthand Funds.
The huge value shifts seen during previous significant transitions in the digital world might also justify Zuckerberg’s inclination to ignore dissenting views and plough ahead, Landis suggested. “If this was a classical governance structure, we would have decision-making by committee and the back-and-forth squabbling would be endless,” he said.
Much of the unhappiness has stemmed from Meta’s failure to give any timetable for when the spending binge might pay off, said Tierney. “They’re spending $15b a year on the metaverse and they can’t give us any mile-markers. It’s just a big hope.”
Written by: Richard Waters and Harriet Agnew
© Financial Times
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