Chit Chat Stocks - Facebook/Meta Platforms (FB) with Matt Cochrane

Episode Date: November 18, 2021

Meta Platforms, formerly known as Facebook, is a technology conglomerate. It is likely you know of and use, on a daily basis, some of Meta's platforms. Matt brings his expert knowledge of Facebook/Meta Platforms for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Matt's work? Follow him on Twitter: https://twitter.com/Matt_Cochrane7?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps Facebook/Meta | (3:56) Shift to Metaverse | (27:37) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our deep dive episode. And today we have on Matt Cochran from 7investing. This is a great time to mention that we are still doing our holiday promo. You can use the code chitchat and get $50 off an annual subscription with 7invest. But today for this interview, we talk about Facebook or should I say meta platforms? Yeah. I said before, when we start with Matt, I don't want to use the M word. It's Facebook to me. Until there's a real metaverse that i use every day i will not i will continue calling them facebook exactly all right um any highlights from the interview oh good as usual love talking about how commerce is very important to instagram um we talked about the metaverse stuff which again it's there's no

concrete stuff with it but it gives a great overview of what money they're spending there and then what money you're going to get back from say the core platforms right now and how you have weigh both those two things the investments in this high risk opportunity and then also how profitable and durable these other apps can be we had all of it uh i think it was a great overview of the business kind of the risk you're taking as a shareholder okay and before we get to the interview we want to talk about our friends quarter they are our sponsor for our thursday episodes uh it is it's now past earnings season so have you been a dau or mau i'm not a dau but let's say i'm i don't have i don't have enough companies to be a da yeah we're concentrated here no big deal

the uh no that's that's just a joke but the uh yeah i'm not a daily active user weekly active user for sure love the transcript parts of it too it's not just listening to calls it's much more they're adding stuff all the time and it's just been out for less than a year so think about it download it now i mean it's going to be much much better every well i don't know if they're going to release something every month but three years from now i mean this thing could be a lot better at. Yeah. Yeah. For anyone that doesn't know, it's basically a comprehensive frictionless way to access conference calls, presentations, transcripts. Sometimes they're the first place that has transcripts out. So they're the first place that go it's quarter. They're a hundred

percent free. They're on Android iOS. I just recommended a company. So if you recommend a company, they should be able to get it up pretty soon. They say that they prioritize requested companies. Other things you can add emojis at different parts of the conference call. So if there's something that you really liked, you can add like a clappy emoji or whatever. So there's just fun stuff that they're adding. It's probably the easiest way to listen to conference calls. I'm surprised there hasn't been a mobile solution prior to this. It's really easy, really intuitive. It's quarter, Q-U-A-R-T-R, no E at the end. You can follow them at Twitter at quarter underscore app. Go ahead and check them out. Without further ado, let's get to the

interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. All right. Today, we are welcomed by Matt Cochran. I think I've lost count of how many times you've been on the show, so I'm just going to go with recurring guest, Matt Cochran. Today,

we are talking about, I don't know, what name should we pick? I think we should pick one now. I don't want to say the M word. So, should we go with Facebook or meta platforms? I think for the next at least five years, I'm going to be saying Facebook, no matter what I mean to say. So we'll stick with Facebook this show. I'm going to stick with Facebook. So I think we're going to vote with that. All right. So first question, then, how how do you kind of look at Facebook today or meta, whatever you want to call it? And then kind of how has your thesis changed since we last spoke?

So, yeah, I think it's fair to say the thesis, the thesis has shifted for sure. Now, I will say it's not like a total 180, though. I mean, this should have come as a total shock to shareholders who are paying attention. Like earlier this year, it was reported that Facebook Reality Labs, the division in charge of the Oculus and now like the metaverse, like had 10x its employees from 2017 to like the middle of this year. So in like four years, it had like, you know, they had 10 times as many employees as it did four years ago. So Facebook was obviously investing a lot to make the Oculus a success. And Zuckerberg has talked a lot about the next computing platform on conference calls. In fact, I think in the second quarter this year, he said, yeah, or the CFOs, somebody

said like, yeah, we're investing billions in this and we'll continue to expect to invest billions. So we knew it was like a big thing. I just don't think anybody really understood the magnitude and the speed at which Facebook was thinking of this and how fast it's moving towards like the metaverse. So we've gone from an underrated network effect play, or at least in my mind, we've gone from like an underrated network effect social media play with a great balance sheet and attractive valuation to still a great network effect social media play.

But now that's one that is shoveling money at building this metaverse platform, which might be a spectacular failure or huge success and so i think it's fair to say the reward now is higher but so is the risk can you give a little bit of reference to the numbers versus kind of the balance sheet and the earnings they're generating like how much are they investing versus how much um you know instagram facebook and the other apps are generating earnings so i don't have like numbers in front of me right now but like like just just get the the like the scope of it. I mean, they said, we're basically, we're starting to, we're going to invest $10 billion after we clear profits from the Facebook Reality Labs division. So like that, and we expect that

number to increase. So like, let's say, you know, if Oculus makes a billion dollars next year, which, which might be a little optimistic, but let's say Oculus and on an Oculus platform makes a billion dollars, they're going to be spending, they're investing 11 billion into it. And after that, they expect that to increase as they go. So even as the Oculus can ramp up in revenue, which i believe it will uh it's growing very fast and i think it's a great uh elite if nothing else it's a great gaming platform a great piece of hardware uh but like the the investment into that is going to go up even faster so uh you know that that's just like a huge huge uh amount of money they're throwing at this thing why do you think zuckerberg is making this pivot like that's kind

a big question uh do you and do you like the decision it's hard to know if this is in zuck's mind a defensive move or an offensive move it's uh you know zuck has seen facebook's entire business model come under attack from the government and regulation you know regular regulatory agencies to other players in big tech like apple with its ios 14 changes so controlling the entire ecosystem has to be a compelling prize for him. Now, that being said, I believe Zuck also has an incredible vision from the start about how the internet

and digital connectedness would work. And so I kind of wonder if he would be doing this anyway, if he truly believes this is how people will connect in the future. So, like, you know, I think it's a bit of defense and a bit of offense at the same time.

Or do you think this might just be a small one? Do you think they're making it such a big deal to kind of this could be just speculative to kind of deflect away like the name change and stuff like that and the whole conferences that they're doing and the interviews do you think that's a bit to deflect away from any sort of like uh i know there's those that huge report the timing just feels a bit suspect although that might not matter in the long run i i think i've seen people say that i think 10 billion dollars a year though says that it's not just for that right facebook was saying we're changing our name and we're all about the metaverse now but like you know they're

still putting in you know a nice amount into oculus you know when they when they said that last on the conference call like you know we're putting billions of dollars into this i mean in my head hey not that i really knew but i was just thought like okay four to five billion dollars in oculus every year and and that's you know they're making big investments so i'm okay with that um uh if they had just continued with the status quo as far as that investment um i think that would like have more like i think that argument might have some weight i think though like i think zuck is is all in on this and i think the name change is just his way of signifying like really to his employees but also to like you know the people like this is this is where we're going

like full speed ahead does it change how you think about the core family of apps like it seemed like that was kind of the thesis for a long time was that these are just cash generating machines and they're going to keep growing at a decent rate does does that change anything the fact they're moving a lot of the investment over to oculus it remains to be seen like what i wonder i i guess like a concern i have or or something i wonder about is like is this going to take zuck's attention away from from those apps and if so is that a bad thing like maybe they're already on maybe they already have the playbook i mean i think we're gonna get into we're gonna talk about reels and all these other things facebook is doing but like you know they already successfully

introduced stories into instagram and into facebook and so you know are they just gonna follow the same playbook for real maybe those the family of apps doesn't require zuck's attention so much anymore. And if this is a way to keep Zuck energized and passionate about the company, then I'm okay with it. And so I guess I don't know yet. Right now, no, it doesn't change my thoughts towards the core family of apps. In fact, I think you're potentially leveraging that to make Facebook's vision of the metaverse better than competing versions that might emerge in the next few years so um uh so we'll see i guess but like right now no uh it doesn't change my thoughts towards like the family of apps when when i was sitting down to like write out some of these

questions i was trying i was trying to think of them but there's so much uncertainty around like what the strategy will be with the metaverse going forward and so i'm curious just who do you think will be the early adopters like will there be particular industries i know gaming has kind of been synonymous with the metaverse for a long time do you think that's the first avenue or is it uh these corporate board meetings that everyone's talking about i would say the corporate board meetings but what do you think it has to be gaming right like it's definitely gaming um and i think you already seen these like i don't know what you want to call them but you could almost call it mini metaverses like with gaming already i mean roblox for sure um it is it's some

kind of early form of metaverse but you also have other games like you know we were just talking about it guys but like minecraft or world of warcraft i mean you know these these games are like for some of their active players are like uh definitely like a digital world where they use to escape i want to say escape reality but i guess you know this is a you know digital reality but like you know that they use as a form of entertainment right let's just say that like you know and they go into these worlds to be entertained into into play i also think i mean in my mind like education here uh like i think the education like model has to be like like this this could be really big for education and i'm kind of to be honest i'm kind of surprised it's

already not uh seen more like educational uses but like i just can't imagine like you have a history class and they put on these glasses and now we're in rome at the you know in zero bc or now we're in uh paris in the 1800s or or etc you know communist uh you know east germany like before the when the berlin wall was up i mean just like to me like those kind of of uses for education or science i would just think about so many things i just i think i there has to be uses for education if we can envision ourselves going into a digital boardroom for a meeting how how can students not enjoy a digital digital classroom but where you can make the things you're teaching about like come alive in a pretty i would imagine pretty spectacular fashion yeah that seems a lot

more compelling than uh than the board meeting but maybe board meetings are just right yeah 100 yeah yeah 100 100 so i think education has to be like a really big thing here like at least in my mind like and you know you get kids using it and i think that's you know you get kids using your your glasses and then you just you know just they just adopt it as they as they move on in life so i think that's to me one of the bigger tickets what do you think will be the main revenue driver from the metaverse is it going to be like metaverse billboards they're just going to have like ads along like the same advertisements or do you think it's going to be like developer fees kind of more like the apple everything that facebook hates about apple essentially i think

like when you when zuck talks about he wants to build up this whole economy a digital economy and i think uh roblox might have the the the closest is closest to maybe like his ultimate vision is right now so like my kids play roblox right which is this is this helps me like really like for an old for an old guy like me like you know it really helps me to see my kids on a a platform like roblox like three of my four kids and granted they're the three youngest ones but like uh you know they're they're 12 10 and 8 and they are on roblox if i give them screen time i mean they're on roblox that's what they want to do so they take their tablets they go on roblox and they you know they regularly put allowance money into you know robux so they can buy things like

they play a game and they have a house and they want to decorate the house so they have what they want furniture and they have to buy furniture with robux so they have to take you know their five dollar allowance and turn that into 500 robux or or whatever it is you know buy and decorate their houses you know or or get something for their avatar so i think like in the future if you're you know this week it came out like nike was already like talking about like has patents now for like some of its like uh for some of its like shoes and and and i don't know if it's clothes or what i honestly i i i think i just read the headline so i don't know no but i know nike has patents for the metaverse and they're already thinking about this and i think it might be like

a thing where like you know you buy a pair of air jordans or you buy a coach purse or you know and and you pay you know you you pay a premium for it because you're gonna scan this qr code and now your avatar has that purse in the digital world or you know has that pair of shoes in the digital world you know i think you're gonna see a lot of crossover like that or you drive this in real life you drive a tesla in real life so now you can drive a tesla in the digital world you know where instead of paying like you know so i think you're gonna have this like almost like a joint economy uh but marketing for sure is going to be huge and developer fees yes i expect all those things um but like i i wonder if we're underestimating i mean we've seen like games like fortnite

you know just have an incredible uh business model because like people want to like buy dance moves and and things like that for their characters you know so um i wouldn't underestimate what people might be willing to buy in the digital world right and this might be a difficult question but what kind of path do you think there has to be to get to so the near-term opportunities kind of gaming that could be maybe the short-term profit uh generator what kind of things you know maybe need to happen to get the oculus to be the number one gaming platform outside of like playstation xbox or nintendo's kind of a unique one but like outside you know getting them away from xbox and playstation and pcs maybe even to playing games on oculus yeah so that's i think

there's two things they need one they need the games like you know just build up their their gaming content you know so like when they announce like uh grand theft auto san andreas is going to be on it that that kind of announcement is really big now they have a resident evil um i think it's already on it um you know in uh you know they uh beat saber saber beats or uh you know that's a pretty popular game on the platform um so the more they get games like they need the gaming content to attract the players and then once they get players they need those players to attract other players you know and i think that's beginning to happen um i kind of think it's going to be kind of small and then all of a sudden it's either going to if it takes off it's going to take off

quickly because you'll get that network effect of players and it'll be like one really one game will finally really grab the imagination and capture that medium right um you know i am not the one to hypothesize on what kind of game that might be um but i i think there will be a game that like really captures that medium well and after that it might i believe it will take off quicker you know and get a lot of players and then you get that network effect going where well my friends are on it so i need an oculus now so i can play with my friends and i need this game and once you get that going um i think you'll see it take off right and it might not be the quest two well probably won't be the quest two right it might not be the quest three or four but it

could be the quest five where they really get it right 100 like yeah i'm talking about like i mean i'm talking look it could could it happen this holiday season sure but i'm thinking like two to four years is what i would say roughly have you used uh quest or i have i have what are your thoughts uh it's pretty it's pretty cool so i gotta say like the best way i can explain it in my old guy terms is like if i went if i took my family to um like a touristy destination like disney springs which if you're familiar with just as all the trendy restaurants and trendy arcades or like a Dave and busters, but like for, for this beat sabers or saber beats, I apologize. I can't remember if it's saber beats or beat saber, but, uh, um, not sure. Yeah. I don't know,

but like, it's amazing. It's amazing game. Like it's really fun. And I would pay like $10 for it to play it once at like a Dave and busters. I mean, the experience is incredible. I mean, when you put on that headset, you are truly transported. Like it's pretty, pretty incredible experience. I played the Star Wars game. It was okay. It was very immersive. You just couldn't do what you would normally do if you're playing a Star Wars game or, you know, playing a game if people are shooting at you, you want to run and, you know, do all these things and can't really do that. So that had work to do. But the Beat Saber game was amazing, like truly amazing. Okay. One more question on this. I'll get back to more investing stuff. The heaviness,

do that? Does it need to be lighter? I didn't, I don't play it long. So it's my son, right? He bought it. He saved up his allowance money. He saved up money from mowing the lawns and stuff. He bought it. I have not played it a long time, but for my 15, let's say I played it for 15 minutes of a few times each. It was fine. I was totally fine with it. All right. All right. Let's go back to more investing related stuff. Sorry. Sorry. Sorry. I'll go, we'll go back to more investing-related stuff. How long of a leash are you giving for Facebook on this? When are you expecting, and I know you said you might not exactly know, from these investments, from all this capital expenditures and operating expenses, how long are you giving them to fulfill this

vision? It really depends on the rest of the business. Here's how I look at it. If the rest of the business does well or continues to do well. So Facebook, Instagram, WhatsApp, Messenger, they continue. I mean, they're almost at saturation now, but if they continue to monetize well, if Reels is another big lever, Instagram, and then Facebook can pull for engagement on those platforms, if they can grow commerce on those platforms, then I'm willing to wait this all the way through because the core businesses is what I want. And I think they're undervalued today. Now, that being said, if the core businesses start to deteriorate, then the Oculus and the Metaverse gets a much shorter leash for me. So it really depends on the rest of the business.

I'm willing to give this, like, if this sucks like experiment and it totally fails and he invests billions into this, then that's obviously really bad as a shareholder. But at the end of it, I'll still be holding on to these great, great businesses that I think are very valuable and cash-generating, cash-flowing, high-margin machines. So that's what I want. So as long as they continue to do well, I'll give this as long of a leash until it either fails or takes off. is it sounds like kind of like pie in the sky thinking but is there a world where the two uh integrate together the family of apps and the metaverse or is that does that kind of not make sense no 100 i think they do i think that's how facebook i think that's how facebook wins this category right so like you're in the metaverse and all your friends on facebook or instagram

are your friends in the metaverse like right so you can like uh play with them like play games with them or share experiences with them in the metaverse and i think like if this works like you know like when like if you watch the presentation with zuck like you uh you saw him just like flipping experiences with all these friends and they're messaging him but that's from your to me that's from your facebook or or instagram uh profile right those are your friends and that's how they message you and i think that's the big advantage facebook has i think it's being shortchanged by other people but like um uh that's the big advantage facebook has over other competing platforms if they try to do the same thing it's that you already have the network

of family and friends do you do you think that a lot of the companies today that are valuable so like a lot of the game publishers um i'm trying to think of other practical uh applications other social medias or is that not what you're thinking yeah like are those going to be the ones that are successful in the metaverse or is it going to be like a great reset like that's a hard question i mean i know that sounds kind of like yeah it's tough but i'm curious what you think i don't know i don't know so like there's there's there's a few ways to look at it like um there could be a great reset um there could be a great reset with the hardware makers too you know like um you know if you look at who was like the big pc makers you know dell overtook all of them

when laptops came out and then when smartphones came out you know dell wasn't in the picture anymore you know or when phones came out like it's blackberry and ikea but when i went to smartphones apple took over so uh with hardware there's been great resets with every like next platform. And you wonder like, um, Facebook, what I'm going to get Facebook credit for is like from desktop to mobile, like Zuck knew when to pivot and how to go all in on mobile. And I think that's what he's doing now. That doesn't mean it'll work again, but, uh, I think there's something to be said that he made that transition successfully. So who are the losers in this scenario, if Facebook succeeds, who are the ones to bet against?

So that depends how much we think this takes over other things, but it could be anywhere from like Apple could be a potential loser. I'm not saying you should short Apple. Don't get me wrong there. But like, you know, if glasses that are made by Facebook overtake the iPhone as our preferred computing device that we carry with us, like some kind of AR glasses, then Apple could be a loser, right? If anything disrupts the iPhone, Apple will be a big loser. So let's just say that. So if this has potential to disrupt the iPhone, Apple could be a big loser. And Samsung, I guess, would be another hardware maker. But it might not replace the smartphones. It might replace our other screen time.

So it might, you know, like TV makers and PC makers, you know, it's like we put on glasses and we can see a big screen in this like a metaverse of like a movie we want to watch or like the work we want to do and have like, you know, like instead of like buying like two or three screens for our desktop, now we can have six or eight as big as we want on our, on our Oculus glasses. Like, so, you know, it could be desktops that are, that are replaced. um i but i would say like if this takes off that i would say like yeah i think desktop you know which are i don't think there's too many investors you know that are like oh

you know into tv make manufacturers and desktops but um like those would probably be the big losers and potentially like smartphone makers like could be could be a big loser if it were to disrupt the iPhone. And again, I am not saying short Apple at all at this point. But yeah, I think if you were an Apple shareholder, you could see this as a potential threat. Anything that could replace the iPhone is a potential threat. And what's the most interesting thing about this is that you got to expect that Apple's investing in this stuff as well. Microsoft's probably investing in it, at least maybe more on the gaming side, and Google's probably investing in it as well so it'll be interesting to see who wins uh over the long term yeah absolutely and uh

you know that's one of the things like we have a spaces right after facebook made these announcements and like what i i think the best bear argument i heard against facebook doing this was that apple is going to make it better like when it's all said and done like apple will you know we'll have the better hardware you know they have wearables now that are used by billions of people you know with the apple watch and and airpods so they already have like a better like feel like how a user interface would work with with with uh with the rest of your body you know and things like that so so and i think there's credence to that like apple could easily win this category you know like i would i wouldn't bet against apple so uh yeah uh it yeah for sure

apple's working on something okay let's hit a quick ad break and then we got more questions on the second half. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song

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patients. The metaverse may be virtual, but the impact will be real. Learn more at meta.com slash metaverse impact. Okay, welcome back in. Another question I kind of have is, do you think that this pivot or this shift of focus, I guess, towards the metaverse takes regulatory pressure off of Facebook. It's just kind of like, we're not worried about it, so you shouldn't be worried about it kind of a thing. Yeah. So I actually think the regulatory pressure is already easing. That might be wishful thinking, but the first FTC lawsuit for illegal monopoly was already dismissed. Now the FTC did file again, but I just think Like social media competition now is very apparent.

TikTok, Twitter, YouTube, Snapchat, et cetera. You know, they just all have huge audiences. I think it's a very hard argument to make that Facebook has any kind of monopoly. Could they be fined for past actions or, you know, again, and they stick their foot in their mouth enough, like, you know, they'll be fined in the future too. But like, yeah, I expect fines to continue, but I don't know. I just kind of, again, maybe it's wishful thinking, but I just kind of think those things are already easing. As far as making acquisitions again, they have been making small acquisitions in the VR space.

They just bought a workout app, Supernatural. They bought some other VR gaming companies. So I think they can make small acquisitions in the VR space. And I think that's smart for them to do. Again, they need content for this medium. So any company like they can buy or things like that to get that content on their platform, which in the future, if Apple comes out with something, now Facebook, Oculus has exclusive content. I think that's great. But as far as like making a significant social media acquisition, like, yeah, no way, no way.

So, but yeah, in this space, can they buy like gaming companies or apps or things like that for the VR? Yeah, they can and they happen. So I think that's smart. Do you think that Facebook deserves a different valuation now with sort of the pivot and focus? So, yeah, the valuation before this, I thought was very forgiving. And I used to think it deserved a higher valuation. And now I kind of think the valuation is fair. A lot more risk is present in Facebook's business plans now.

You know, the company's going to be spending starting at $10 billion a year. and then it's from there it's just going to go up on its metaverse ambitions so i think uh you know the valuation kind of went from being attractive to being fair now uh because again um i don't know if it deserves a lower valuation because again if this all just completely fails and you know zuck waste 50 70 you know even upwards from that as much money as that is um and it just fails it doesn't work um they're going to learn valuable technology and have valuable things from it that they can apply elsewhere and as long as the core apps are still solid then there's still a it's still a great business there so you know it's not like it's even as much money as they're

spending it's not an existential crisis for facebook it just fails so i i think the valuation it's fair now i used to think it was more attractive now i think it's it's fair so Yeah. And with those expenses, just to see, for example, for people to know, they're still able to spend, I don't know what it is per quarter, $10 billion. You maybe know better, $10 billion on buybacks per quarter. So it's not like it's taking all the cash they're generating. They could outside, including these quote unquote metaverse investments, they could still generate, I don't know, $250 billion in excess cash over the next five years. Does that seem unreasonable or am I getting- No, I think that's, that's about right. Yeah. Like, uh, yeah. Well with the 10 billion, that might be, uh, that might be a little optimistic, but actually I, I think that's the right ballpark. I think that's the right ballpark. Um, just, just a testament to how much cash these, you know,

the core apps throw off, you know, they haven't really even done anything with WhatsApp yet. So I, I just think like, uh, uh, yeah, as long as the core apps are there, This isn't an existential crisis for them, even if it just completely and utterly blows up and is a spectacular failure. And people talk about Facebook changing their name to Metaverse, like Coke changing to the new Coke recipe in the 80s. It could be a horrible failure. There's still a core business to fall back on.

All right. And that's a good introduction to the rest of this conversation. We're going to stop talking about these Metaverse investments. And we're going to talk about the durability and anything with the core apps. To introduce that, Zuckerberg said they're going to try to reinvest to get 18 to 29-year-old users to stick with their apps. What do you think of that strategy as investors? Does it show strength or smartness or weakness? What are your thoughts in general?

Well, I just think it's smart and it's a reality of like just knowing what your what audience you need to attract for for to be strong in the future. So like to me, this this really means reels like reels is like the really big thing on Instagram now. Let me just I skipped a little quote here from Zuckerberg in the last conference call. He goes, I think every once in a while, a format comes along that allows new types of content. So we saw this with news feeds. We saw this with stories. And I think Reels is, from everything I've seen, has the potential to be something of

that scale where there are different flavors of it in different apps. But I think as a format, it can be very fundamental. And I think we're still closer to the beginning of that journey than we are to its maturity in terms of having just rolled out some of the initial tests and experiences on Facebook. So like, you know, and this is all from TikTok, right? I mean, like, they're just copying what like TikTok has made so popular. But like, to be fair, like, I haven't, I've had an Instagram app for maybe a couple years, like when my oldest son got an Instagram app, and I just wanted to monitor him. And I, to be honest, I don't do a good job of monitoring him. Well, I go on it every once in a while and I try to scroll through and then I scroll through my own feed and it's pretty lame because I never spend any time on there. So I've never spent more than five minutes on Instagram in my life until about maybe a month or two ago. And I started, I discovered Reels and I was like, let me check it out. And it's incredibly addicting. And people say TikTok's more addicting. That scares me to put TikTok on my phone because Reels is enough addicting for me where it's like a 15-second video, but then I look up and it's like 30 minutes later. I'm like, how could I watch that many videos? That's crazy. But like, uh, I think that's, I think reels is going to be big.

And, uh, I think he's right that this is like, uh, you know, it's perfect for our ADHD, you know, generation, like lives we live now where we want like tweets instead of articles and we want like 15 second videos instead of like five minute videos. So, uh, I think it's like, uh, it's going to be, it's like a new media form, a new medium and, and reels is going to be really, really big. And I think that's basically what he's talking about is like just growing real. So making that a fundamental part of Facebook and Instagram and maybe even a separate app one day. I mean, they've proved to be good copiers of other tech, like with Instagram stories.

I don't know if they apply. So, yes. Okay. So I'm going to defend big tech here because Microsoft is accused of this all the time. Right. So, yeah, but that's like what businesses do. So, like, you know, I don't know who invented the first cheeseburger, right? But, yeah, other restaurants copied that.

You know, it's like you copied the cheeseburger because that's like a great American food right there. Everyone copied Fortnite. Right, right. First player shooter games, like, yeah. So, everything is, like, copied. Like, if a new type of couch, like if Restoration Hardware, you know, the new type of couch that's really, really popular, you know, everybody else will copy that type of couch. So, yeah, like, you know, that's just smart business strategy. If there's a really new type of popular, you know, seltzers, look at seltzers, alcoholic seltzers, you know, when they came out, like people just copied that, you know, and that's just like you have to do that in business because you're never in-house going to develop and launch new products that are always popular.

Competitors will do that, you know, in a capitalist society. and, you know, you, you put your own spin on that and release it to yourself. And, and look, I mean, way off topic, but like, I think Microsoft, uh, has done that like with teams, you know, over with zoom and Slack features and things like that. And I, Microsoft is one of my other like favorite investments, you know, one of my other largest positions, because I think, uh, yeah, the ability to say, oh yeah, we can do that. And then do it is, is a good idea, you know, like, yeah. yeah and have the scale to do it well 100 yeah microsoft has the distribution facebook has the

users and uh they see that and and it doesn't mean tiktok fails and then zoom is still a very viable business and so is tiktok but like yeah absolutely every you know uh even even twitter had stories for like a second or two right right oh right you might not be as good at copying that shows that the execution matters right the twitter execution definitely matters execution definitely matters uh but yeah like i mean that's just like that's good business sense like you have to in a sense copy what people do because that's like you know if walmart comes out with delivery or or curbside pickup target target or costco you know uh they need to copy that if it's so popular Yeah. Yeah. All right. And the big question, I think probably the biggest question for Facebook

investors in the near term is the growth of Instagram. That is the huge growth driver right now. I know everyone talks about the durability of the core Facebook app, but everyone's heard that argument before. What products and services have been launched for Instagram and how much bigger now, this is a tough question again, how much bigger do you think you can get from this trajectory so all depends on commerce so one we already talked about reels and i i i think like that's going to be big on instagram like it's just like uh um it's just an incredible format right like if um it and that's like so that's another story that's another place where they can insert ads that increases their uh you know like their their their infinite billboard where they can

place ads in front of people so so that's just a lever that you pull but commerce is the real like going to be the driver if edge spam has another whole leg of growth up or not um and they're focused on it and the thing i'm worried about with the metaverse is if like this still needs more attention and now the company's like distracted but um you know like cheryl sandberg was saying like look they're focusing on three areas um they still want to make it like the best place to advertise. You know, they want to make it really, and then just really easy to sell on the platform and then improving the customer experience. Like, so like, you know, so if people can advertise on it and then you just make it like a frictionless experience for the customer

to click on whatever the advertiser's advertising on and they have bought it, like how it is on Amazon, like, you know, Amazon has got to be like, in my mind, like the most frictionless shopping experience ever. You just click on it and it's going to be at your doorstep in a day or two. And that's, I mean, that's just like amazing. You click on one click, you know, shopping. And if Instagram can mimic that, again, copy, right? So you just copy this, like, click on it, and they already have your billing address. You already have your payment information. They already have everything they need. So you can just one click, ship it, and it's there. um if they can make that a very frictionless experience um and advertisers still want to go to instagram because it's still one of the best places to advertise then that's a a powerful powerful combination and um and that could be a whole a whole other leg of growth up for for instagram and and then maybe facebook after that but like commerce is going to be is a really big

question for me with facebook and instagram because if they can really gain traction with commerce then there's just with the core apps and not even talking about the metaverse there's still a lot of room for for them to grow and if it just becomes a side project like well yes you can buy things on the platform but it doesn't gain that traction um then i'm a lot less excited so commerce commerce is important to me for like a bull thesis for facebook and instagram uh going out in fact if i if i i don't know if i want to say this but like i almost think it's more important than like the whole metaverse thing like it because if commerce can really take off on instagram and facebook then i don't care about metaverse if you tell me reels is going to take

off and commerce is going to take off in a big way on uh facebook's platforms then the the metaverse thing can be a complete bust as far as like as far as i care all right run you heard it yeah no yeah the uh the i think that makes sense the e-commerce stuff like and it's gonna be way more profitable in the short term the only bummer is that yeah i keep thinking i'm like well if the core family of apps just keeps growing then who cares but if they're using all that cash to send it back over to the metaverse then then the execution there is still hugely important yeah you're right but but eventually what I'm saying like eventually like if it fails it fails and so like you know they'll they'll see that eventually might take a while it might be I'm

sure it'll be several more billion dollars uh tens of billions of dollars than I want it to be but uh but eventually it comes back and if commerce takes off then that's that's just huge because that user base you know the billions and billions of global users I mean that's All of them are consumers. Right. So that's just that's just like, you know, if shopping takes off there, then I'm good with that. Right. And speaking of users, how are Instagram users doing? I know people talk about Facebook, the blue app, like the user growth stagnating. I don't know if it's actually happened, but, you know, it's the narrative. Are Instagram users doing well? What are your thoughts on that?

um i think they're yeah like i i think it's fine is what i would say like i mean i don't think you're seeing explosive growth there um but i don't think you're seeing like people take away like or you know go away from it either um i think what they acknowledged on the conference call they need to get younger you know i think you know look i think like you know facebook is for digital boomers uh like me mostly and then instagram's for that like uh older set of millennials in their thirties, maybe, you know, and not quite as global as big Facebook. Um, but they know they need to get that, like that younger cohort of millennials and Gen Z, you know, and they don't have that, or, you know, they don't have it in, uh, as much of a meaningful way as

they have those older, older segments. So, uh, yeah, I think that, but I think reels goes a long way towards like, you know, doing things like that. And, uh, and I think, you know, we'll see what other tricks they have up their sleeves but uh um yeah i think i think instagram is fine for what it does and it's massive but yeah are you seeing that explosive growth in um uh no you're not what uh what progress have they made with whatsapp and then i guess what else do you think they can do with whatsapp so like i don't know if this is me just like trying to like uh like hold the bag for Zuckerberg or not, I really think that was more of a defensive acquisition than offense. And I think defensive acquisitions can be very important. I think Google did that with

Android. And I think that was a very important defensive acquisition to make, to have that automatic set of users, like how Google be the default for on their phones. So in the same way, I think messaging apps were totally taking off. Messenger was not yet separate. And WhatsApp had a very much more of a global base. So I think in that way, it was important for them to have that in their family of apps. Now, in the strategic synergies, it could bring one day to the whole ecosystem. Could be huge.

uh like if commerce takes off as a way for customers to connect to the sellers and as a way for like the business to be transacted on as a way to move money like it's already been approved to move money i think in india and brazil uh you know i i think like there's a lot of potential for whatsapp still um but right now it's still more defense than it ever was like anything offense wise but i think one day in zack's overall vision i think one day it's uh has a very important piece uh you know it's an important piece to the puzzle okay any uh any more questions i don't know i guess uh what's sort of the the bear thesis what could go wrong what if you were writing a pre-mortem here what went wrong

that's a great question and i used to say regulation right that was the bear thesis i thought the the stock was attractively valued enough that if things didn't work out um it would still basically be okay and now i got a whole list of things like uh so one uh commerce doesn't take off like commerce just never takes off on the platform and so it's stuck being an ad business and uh then i think you're in a position where you really want the metaverse to take off you know and you need that to be really big for facebook and there's a whole lot of concerns there right because like uh apple can make an ar or vr glass competitor that takes like the metaverse market share so could microsoft by the way we haven't talked about microsoft but they already

have hololens you know so they're and then there's there's there's sony and there's samsung who could also make glasses um you know facebook i think their hardware they have made has been good but it's not also it's also very fair to say it's not really not taking off in them you know uh in a in a in a big way with the public so um you know there's there's a lot of competitors out there that are gonna be making uh hardware for you know for the metaverse and you know it's very it remains to be seen if Facebook's going to win that. And so there's that concern. Meanwhile, so if commerce doesn't take off and they're not winning on the metaverse, like you have these competitors like TikTok and Snapchat that are doing better with the younger

cohort on social media that just appeal to younger people more. So if that just continues to eat away at the margins and Facebook becomes like the, uh, like the boomer social media, you know, like site, you know, uh, and I, I mean, I'm using boomer loosely, like how, you know, in slang way, but like, then, then, then that's the bear thesis. And that's not that valuation deserves a much lower valuation. Uh, you know, like if these things don't take off and so, uh, there's a lot of, there's a lot of risk here that was not there, uh, before this. So, you know, there's a long list of things and Suck is distracted with the metaverse and that doesn't win. And then these other things like don't get the attention they need or, you know, like that could play out.

This could play out. Like, I think the bear thesis is real. I haven't sold my shares. I'm not going to. But I mean, this is there's there's more risk here than was here, you know, earlier earlier this year. right all right that's a good way to wrap up i think yeah uh we we did this last time but for any new listeners where can they find you oh at seven investing.com or twitter i'm at matt underscore cochran seven um so i'm always on twitter i'm on it way way too much so you can always dm me or or just tag me on a post or something but i'm always on twitter and seven investing.com i'm a lead advisor we come out with stock recommendations every month all right and we're running the $50 promo right now. So $50 off the annual subscription through the end of the

year. So perfect timing. Use code chitchat. Not our typical CCM, different code, use chitchat for the $50 off. But I think it's going to do it. So we want to remind our listeners that Brett and I are not financial advisors. So anything we say or discuss here at Chitchat Money is not formal advice or recommendation. We are however, general partners at Arch Capital. So clients may have positions and the securities discussed in this podcast. Thank you all for listening. We'll see you next time. Do you want to step up the ladder? I want Conrad dead.

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