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Weekend thoughts: $META and record market cap moves
We hosted the monthly fintwit board game night in Mid-October (I mention these every month in my monthly links; feel free to email me if you’d like to get added to the list). This is going to surprise you, but when finance people get together for board games (or anything really!), the conversation often turns to stocks.
Anyway, META / Facebook has been on my mind recently, and when our board game night inevitably turned to stocks META came up and someone asked, “Hey, didn’t they have the largest one day market cap drop in history?”
And the answer is yes, they did! They lost a staggering $232B in market cap in one day earlier this year.
Here’s another fun fact: the largest market cap gain in history happened exactly one day after Facebook’s drop, when Amazon added $190B in a day.
But I wanted to focus on Meta a little more, because two things jumped out at me.
First, as I write this, Meta’s market cap is $240B. That’s just incredible. If META’s stock price ticks down just a few percentage points lower, META will have lost more market cap in a day than they end the year with (I.e. they lost $232B in a day and their market cap will be below that number).
Obviously that’s happened to companies before (all it takes is your equity going to zero during a year and by definition you would have lost more in market cap on every day your stock went down then your year end market cap!), but there’s something crazy about even the possibility of it happening to a company that had a one trillion dollar market cap!
That got me wondering: is there an event path where META could have the largest one day market cap drop and market cap gain in a single day?
It’s almost certainly not going to happen. Again, META’s market cap is ~$240B and the largest market cap gain ever is $190B, so to take the title would require META’s stock price almost doubling in a day. There’s almost no chance of that happening.
But there’s a little wiggle room between “almost no chance” and “no chance”. Imagine the following happened on the same day
META put out a press release announcing massive layoffs they’ll use to boost margins.
The company announces they are spinning off the entire META project into a separate company from the core Facebook / Instagram / WhatsApp business.
They announce Zuckerberg is going to focus on the new company, where he’ll be CEO. He’ll switch to the chairman at core / legacy Facebook, and with that move Facebook will collapse the dual class stock structure. The legacy Facebook company will be focused on maxing out monetization and engagement across the core apps, cutting costs, and returning cash to shareholders.
On a call discussing the move, Facebook announces that they’re seeing improving advertising trends during the quarter and that their outlook for 2023 is improving
What would META’s stock be up on that combination of announcements? It seems crazy to say out loud, but 50% seems possible. A 50% up move from today’s ~$90/share price would send the stock to $135; Bloomberg tells me the company is estimated to earn >$10/share next year. So even a move that big would leave META with a well below market multiple despite having ~10% of their market cap in cash! Not exactly crazy expensive.
Is a 100% move completely, completely impossible in that scenario? It would take Facebook’s stock to levels that is hasn’t seen since…. May of this year! It’d send the company to ~$180, which would be 18x P/E…. but the “E” in that “P/E” would almost certainly be going up given the expanding margins (from the cost cuts and operating leverage), improved growth outlook, increased buyback (reducing the share count), and (most importantly) the reduced drag from the metaverse experiment.
I mean, it’s not going to happen, but that combo would give you a scenario where, in one year, META enjoys the largest ever one day market cap move up and down.
And playing around with the numbers like that shows just how quickly Facebook has gone from a literal trillion dollar unstoppable juggernaut to a company with a massive, massive capital allocation / controlling shareholder discount.
I have no position in META. But if you think Zuck isn’t completely insane… if you think he’ll ever get capital allocation discipline, or he will eventually see the light and through in the towel on the META project if it becomes clear that Facebook isn’t winning it…. well, it does seem like the market is not pricing that in!