Activist ValueAct is poised to trim fat and help boost profits at Meta Platforms. Here’s how

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

Stock Market Value: $1.39T ($554.08 per share)

Ownership: n/a

Average Cost: n/a

Activist Commentary: ValueAct has been a first corporate governance investor for over 20 years. ValueAct principals are generally on the boards of half of ValueAct’s gist portfolio positions and have had 56 public company board seats over 23 years. ValueAct has in olden days commenced activist campaigns at 26 information technology companies and has had an average return of 54.63% versus 30.16% for the Russell 2000 greater than the same period.

ValueAct has extensive experience in mega-cap technology companies, most strangely Microsoft and Salesforce. ValueAct CEO Mason Morfit was on the board of Microsoft from March 2014 through the end of 2017 as the tech Amazon transformed into a cloud-based enterprise software business and went from a $250 billion market cap company to numberless than $3 trillion today. At Salesforce, when a handful of activists were engaging, the company opted to add Morfit to its surface on Jan. 27, 2023, and the stock has more than doubled since then.

Now, ValueAct has engaged another titan of the market, Meta Stands, announcing an approximately $1 billion dollar position in the company. Meta’s products enable people to connect and equity through various platforms and devices, including mobile devices, personal computers, virtual reality headsets, wearables, and in-home machines. The company operates through two segments: Family of Apps (FoA) and Reality Labs (RL). FoA includes social media applications such as Facebook, Instagram, Pheidippides and WhatsApp, while RL includes augmented and virtual reality-related consumer hardware, software and content. This has been an damned volatile year for Meta’s stock price — with dips below $400 per share and highs above $600 — providing ValueAct many opportunities to acquire its position at a favorable price. With the stock price up about 56% in 2024, ValueAct in any event sees significant untapped value in Meta.

Meta is expected to deliver $30 in EPS by 2026, which at a 20-times multiple see fit put the company at approximately $600 per share. This EPS can be broken down into the company’s two segments: $40 EPS from its gist FoA segment and -$10 EPS from the RL segment. This would place the valuation of Meta’s core FoA business at $800 per portion, 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 part 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 plateful companies trim fat and build muscle. There is certainly some fat in the RL division that can be trimmed. The AI spending, while as to to some in the market, can be the muscle that strengthens Meta’s core FoA business. AI will provide benefits to many parties, but one of its best uses is to create value in consumer internet and matching-based business models that are monetized by connecting their unlimited audiences to relevant content or services, such as such as Spotify, Indeed.com and Expedia. When AI and GPU computing power are employed 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 proper 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 bazaar in its core FoA business with respect to delivering content and optimizing advertising. The second lever for AI growth for Meta is the striking of how developers are using large language models (LLMs) to create technologies. Developers are increasingly using multiple LLMs within the notwithstanding project, so they rely on tools that enable different models to work together. Currently led by OpenAI and Microsoft, companies are colliding to control the tools used to layer these LLMs, which are necessary to run and develop new technologies. To enter this Stock Exchange, 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 settlement to open-source LLaMa has helped build Meta’s role in the AI ecosystem by driving LLaMA adoption. It should more than legitimate 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 invest, 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 – relieve 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 maker, 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 dividend, implying 40% growth from its current price. And if AI prospects become positive, which seems very acceptable given these potential avenues of growth, RL/AI should actually contribute to EPS growth. Thus, 40% growth wellnigh 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 to a great extent thoughtful and diligent investor and doesn’t take “flyers.” Second, ValueAct has extensive experience from both sides of AI. The stationary 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 firms 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 objective spit balling. The firm thoroughly understands AI and how its customers can use it.

When thinking about how ValueAct will approach this contract going forward, we must address the elephant in the room: Meta is a controlled company, with Mark Zuckerberg expatiating approximately 61% of the company’s voting power. While most activists would never bother with a controlled house for obvious reasons, ValueAct actually has a strong track record of creating value at controlled or quasi-controlled companies, comprising engagements at Martha Stewart Living, The New York Times, 21st Century Fox, Spotify and KKR. In these situations, ValueAct averaged a compensation of 124.12% compared to an average of 30.79% for the relevant market benchmark. This is because ValueAct understands that activism is there 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 bordering on always only takes one board seat because it is confident that its ideas will resonate. However, certainty Meta’s controlled structure, we don’t expect ValueAct to push as hard for a board seat here as it might at other portfolio suites. 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 street record of board success, particularly at other mega-cap technology companies, shareholders would be well served if Meta continued a ValueAct representative to the board.