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We at Alaric Securities always try to go beyond the obvious and explore seeing things differently. Our new series, Market Insights, aims to give you another point of view based on pure statistics.

Enjoy the reading, and we wish you profitable trading!

November 4, 2022 | Issue 1

Is META a Leaking Tire Kind of Stock or Just a Soft Tire

Nikolay Stoykov
Managing Partner at Alaric Securities

What lies behind the huge meta plunge last week

  • Facebook’s parent’s shares hit their lowest level since 2015 after Q3 2022 results
  • Mark Zuckerburg is betting the house on the Metaverse, which might take a decade to arrive.
  • While the company acknowledges it’s unlikely to deliver significant revenue for years to come, its strategy is limiting earnings.

META had earnings last week, and things did not turn out well. The company reported $1.64 earnings per share vs. the $1.89 expected. Revenues also came up short vs. expectations but more importantly, the company guided down for the next quarter. And, of course, the stock dived from 130 to 100.

But what does this all mean? Is it a buy or a sell here? Was the stock trading in the 350 range only a year ago?

Indeed, the way we look at this may be a possible buying opportunity. Not necessarily, we would say. Tangible assets like metals tend to have a natural price floor. It is possible that some commodities like oil that have special storage requirements to experience stress in the short term and temporarily breach that floor (think spring 2020) but eventually, production gets reduced, and prices stabilize. And that is a historical pattern – if the cost of any metal drops by 70% in one year, practically all the time, this is a buying opportunity.

Stock certificates don’t have storage requirements, and you would think they should easily have a price floor. However, that is just theory. In theory, there is no difference between practice and theory. In practice, stocks rarely have established valuation floors, and once you get into the business of buying cheap stocks, it feels like a leaking tire. The tendency is for things to get worse and worse. Practitioners call this a value trap.

So, the question is – is META a leaking tire kind of stock or just a soft tire?

From our point of view, META is a leaking tire, and that danger is obvious, except people usually dismiss that argument.
Here is why: one of the fantastic things about sports betting is that betting lines on AVERAGE are more accurate than ANY person. That is right – you hear about a bettor winning it big once in a while, but on average, the bookies win! Practically every week! It is statistically so challenging to beat the lines consistently that any individual consistently winning over the years is a fixer, practically no exceptions. It’s just how it is.

The leaking tire in META is… Mark Zuckerburg

Yes, he made billions by being an innovator, but innovation is unpredictable in the long run. Just because you were correct once in your bet does not mean you will be right in the next, even if you studied at Harvard.

Mark Zuckerberg owns nearly 17% of the common shares and almost 54% of the voting right in the stock, which means he pretty much and he alone controls the company. Yes, he made it big with META, but he is betting the house on the Metaverse, which might take a decade to arrive. And the decision on that bet is his and his alone. And history suggests that groups of experts are better than any individual expert on average.

We can already feel some of you saying – but he can ask experts. Indeed, he can, but the decision of what to do is his by the virtue of his significant shareholdings.

The important thing is that this is a prevalent pattern to observe if you regularly visit casinos. Somebody wins big on the blackjack table and, on the way to the cashier, drops a few chips on the craps table. Yes, extraordinary success tends to make people reckless, and our experience is that the path to being “completely rational” is long and, in our opinion, practically impossible.

Key Takeaway

While we are very optimistic about the future performance of equity markets and possibly a rising tide in equity markets that can lift META stock, we would not be looking to buy it under any circumstances. Or at least for now.

The articles, podcasts, and newsletters from Alaric Securities LLC solely represent the authors’ views affiliated with the company; they do not represent the perspectives of Alaric Securities LLC or any of its subsidiaries or affiliates. They are provided solely for informative purposes and do not constitute recommendations for or against the purchase or sale of any security, digital asset (such as cryptocurrency), or other assets in any account. They are neither research reports, nor meant to be the foundation for any investing decisions. Any third-party information given does not represent the views of Alaric Securities LLC, or any of its subsidiaries or affiliates. All investments carry risk, including the potential loss of principal, and past success does not assure future success.