Can Meta Actually Survive This?

0:00 Facebook's parent company, Meta, has, to put it mildly,

0:03 not been having a very good year.

0:05 It has splat effectively all of its free cash flow and then some

0:08 into competing in the AI race only to end up coming a convincing fifth place.

0:12 It has now accumulated more than half

0:15 a trillion dollars in offbalance sheet debt.

0:17 Its other side projects have been all but abandoned,

0:19 and it's been hit by several lawsuits that could all potentially

0:22 set up a precedent that would simply make their business nonviable.

0:25 Earlier this year, they were forced to pay $2.1 million in damages

0:29 to a single victim for the mental health damage they had caused her.

0:32 Now, $2.1 million alone is barely a drop in the bucket for a company like Meta,

0:37 but it did set the standard for thousands

0:39 of similar cases that people are bringing against the platform,

0:42 and that many drops can quickly add up.

0:44 Also, given how much attention that case got,

0:46 there are now naturally even more people lining up to sue these companies.

0:50 In addition to this, Meta has also been forced

0:52 to pay over a billion dollars in two separate state cases.

0:55 And just last week, it went to court again

0:58 for a potential $1.4 trillion case brought against them by dozens

1:01 of states for platform features alleged to have been specifically

1:05 and unlawfully targeting users under 13 without proper parental consent.

1:09 That is, as of the time of making this video,

1:12 more than the entire company is worth and many

1:14 times more than the business has in actual assets.

1:16 So even in the much more likely outcome of a fractional settlement in this case,

1:21 that alone could still render them insolvent when

1:23 considering all of the other financial commitments they have

1:26 tied themselves to, which of course raises the question

1:28 of would the government actually let that happen.

1:31 Well, yeah.

1:32 So about 2 hours before we posted this video yesterday,

1:35 we got an answer to this question.

1:38 No, the government did not let this happen.

1:40 The company was allowed to settle for just under $17 billion.

1:43 But we will get back to this later on.

1:46 Even if you are rightfully skeptical about

1:48 this company actually being held responsible here,

1:51 these are still risks that are compounding on one another.

1:53 Risks that the market has clearly already priced in.

1:56 Meta stock is down almost 25% over the last 12 months.

1:59 At the same time, the Magnificent 7 as a whole is up by over 30%.

2:03 Now, this is normally the part of the intro where I say that, well,

2:07 at least they still have a very stable core business

2:09 of harvesting our attention and selling it to advertisers, right?

2:12 But even in this most basic part of their operation,

2:15 there are a number of problems just under the surface

2:18 that are each seriously worth addressing if they are going to survive.

2:21 And I guess just for a bit of fun,

2:23 it's also worth asking what happens if they don't.

2:26 The US government and more than 40 states are suing Facebook.

2:30 They're accusing the social media company of using

2:33 illegal tactics to squash competition and eliminate rivals.

2:36 Meta's AI system, Llama, has been approved for US government use.

2:40 agencies can experiment with the free language

2:42 model as the administration pushes to integrate AI.

2:45 And we're also kind of like on on the side

2:47 of that, we're also missing the go to market for for Llama.

2:50 While the current spending levels and here it gets really

2:52 interesting both looking at at the OPEX and and capex trajectory.

2:56 Meta actually runs out of cash tapping into net debt territory by 2027.

3:00 70% of new advertisers on Meta's

3:03 platforms promote scams or poor quality products.

3:07 Okay, so perhaps one of the biggest overall risks to the company itself,

3:10 is that unlike a lot of other big tech

3:12 businesses that have a clear vision of the future, however flawed it may be,

3:16 Meta has kind of been flip-flopping for more than a decade now,

3:19 chasing whatever the hottest new trend in tech is,

3:21 and that's caused a few problems.

3:22 The first is that it's just made a lot of questionable investments.

3:26 I think we have somehow all forgotten about it.

3:29 But in 2019, during the third major crypto boom,

3:31 Facebook tried to launch the Libra token,

3:33 a stable coin that was apparently going to redefine digital economics.

3:37 It even signed up backers like Visa and PayPal before regulators,

3:41 who apparently cared about this stuff back then,

3:43 made it very clear the project was dead on arrival.

3:45 Its remains were eventually sold off to a bank for about $182 million.

3:50 And that bank then also collapsed.

3:52 After that, it plowed billions of dollars into the metaverse and Reality Labs,

3:56 which are now all but deceased.

3:57 Because it turned out that not many people wanted

3:59 to spend their days sipping virtual coffees with an amputated Zuck.

4:02 Reality Labs has lost around $88 billion since 2020,

4:06 and it is still losing more than $4 billion

4:08 a quarter on less than half a billion in sales.

4:11 But in a weird way, it potentially could have been a lot worse.

4:15 There's a good argument that the only

4:17 reason the company didn't keep piling money

4:19 into that particular furnace is because it once

4:21 again pivoted its focus this time to AI.

4:24 Now, I know you guys are sick of hearing me say it,

4:27 but this AI bet has been kind of expensive

4:30 for all of these companies putting themselves in this race.

4:32 And even if they win,

4:34 there is still no guarantee the rewards will justify the cost.

4:37 Again, there is only so many times I can say the same thing.

4:40 But Meta in particular has been making

4:42 some pretty questionable riskreward trade-offs to get here.

4:45 On one hand, it's taken on a lot

4:48 of obligations in so-called offbalance sheet debt.

4:50 Some reporters have found hundreds of billions of dollars in commitments

4:53 on top of the massive spending it has actually properly reported.

4:57 Meta's own filings now casually disclose around $350 billion worth of data

5:01 center leases that it has signed but haven't even started yet.

5:04 and then almost exactly that much again in purchase

5:07 commitments for things like servers and rented cloud capacity.

5:10 Some of the biggest headline data center projects are also technically

5:13 owned by joint ventures that Meta only holds a minority stake in.

5:16 So the tens of billions of dollars in bonds that pay for them get

5:20 issued by special purpose vehicle entities

5:22 with names like Bignette Investors and Soapia Investor.

5:24 Yes, they are naming their shadow debt vehicles after Fried Dough.

5:28 And no, that debt does not show up on Meta's books.

5:32 Now again, Meta is not alone in doing the debt obligation disappearing dance.

5:36 But in return for all of this, it has

5:38 a model that isn't really that competitive with other Frontier companies.

5:41 When their flagship Llama 4 launched last year,

5:44 the version sent to the benchmark leaderboards turned out to be

5:46 a specially tuned model that wasn't what the company actually released.

5:49 And when the real one was tested, it came uh 32nd.

5:53 Their new closed Frontier model has reportedly been delayed multiple

5:58 times after internal testing put it behind Google's latest releases.

6:01 Apparently to the point where the company discussed licensing

6:04 Gemini to power its own products in the meantime.

6:06 So even if the AI race does pay off, it's unlikely that Meta will be the winner.

6:11 Another major difference between Meta and the other

6:13 hyperscalers is that up until recently,

6:15 Meta did not have a data center leasing business like Microsoft,

6:18 Google, and Amazon did.

6:20 Renting excess capacity out to other companies has

6:23 led those firms partially derisk their massive bets.

6:25 That was up until the last few months when reports emerged

6:28 that they were exploring selling off some of their excess compute,

6:32 which is both a perfectly sensible idea, but also kind of an admission that they

6:36 might be building more than they can use.

6:38 And beyond that, even if it did have

6:40 an amazing model that could outperform existing competitors,

6:42 there is the question of what is Meta actually going to use that for?

6:46 At least the other companies can talk about

6:49 the possibility of existing commercial partnerships paying huge subscriptions

6:51 to use their software or something like Amazon potentially

6:54 replacing millions of warehouse workers with advanced AI enabled robots.

6:57 But Meta doesn't really have the same infrastructure here.

7:01 Advertising still makes up about 98% of the revenue.

7:04 Maybe to play devil's advocate, it could help them a little

7:08 bit with content moderation and algorithm enhancement,

7:10 but they don't really need a super intelligence to do that.

7:13 And I mean honestly any kind

7:15 of intelligence could probably improve Facebook's algorithm,

7:17 but we will get to that.

7:19 The point is that this constant trend of chasing might give you the impression

7:22 that Meta is kind of ashamed of what their core business actually is.

7:26 Perhaps that they are desperately trying to find

7:28 the next thing to center their company around.

7:30 I mean the whole reason they are now called Meta and not Facebook

7:33 is because they thought this would come to define them as a company.

7:37 So yeah, the reason it feels like that is because it do be like that.

7:41 Facebook and Instagram, by far the company's largest revenue sources,

7:44 and the platforms that actually pay for all of this trend chasing,

7:48 are reaching fundamental limits.

7:49 While there is still modest user growth year-over-year,

7:52 almost all of it is coming from lower income

7:54 regions where users are simply not as commercially valuable.

7:57 On the other hand, growth in the markets

7:59 that actually make the vast majority of the company's revenue,

8:02 North America and Europe, has stalled or actually reversed.

8:05 In Facebook's case, audience trackers at Earketer

8:08 reckoned the American audience has actually started shrinking,

8:11 especially among anybody under 25.

8:12 The last time Meadow was brave enough to publish regional numbers,

8:16 an American user was worth about five times the global average,

8:18 which is why the vast majority of the company's

8:20 revenue still comes out of the US,

8:22 Canada, and Europe despite actually having far more users everywhere else.

8:26 People also aren't spending as much time on their platform as they used

8:29 to, as attention gets split a lot more over competitors like Tik Tok,

8:33 which actually passed Facebook last year in the total

8:35 minutes Americans spend on it every day,

8:37 even though they still only had roughly half as many users.

8:40 Again, not a great sign for a company whose product is people's attention.

8:43 Now, there are workarounds to keep making more

8:45 money even with a stagnant pool of users,

8:48 like leaning more heavily on monetization.

8:50 But Facebook is arguably already overdoing that.

8:53 Their platform has been squeezed so far away from its original

8:56 purpose that not many young people willingly scroll their Facebook feed anymore.

8:59 According to Pew, the share of American teenagers that use Facebook at all

9:04 has fallen from over 70% a decade ago to just 31% today.

9:08 Beyond alienating their audience,

9:09 this overmonetization has ironically even scared away a lot of advertisers,

9:13 but we will get to that soon.

9:15 The point is that Meta could continue to collect rents on those two

9:18 platforms and probably return a lot more money to their shareholders.

9:21 But there will eventually be something that comes along

9:24 and does to them what they did to MySpace,

9:26 even if for no other reason than young people just

9:28 don't want to share their social media with their parents.

9:30 And that can happen fast.

9:32 Not to get too optimistic here, but MySpace went from a $580 million acquisition

9:37 to a $35 million clearance sale in 6 years.

9:39 At worst, it was losing 10 million users in a single month.

9:43 Meta knows this and it's the reason why it's trying so hard to rebrand

9:47 into whatever the next big thing is because if they admit that this is it,

9:50 then their long-term value as a company is considerably different.

9:53 Now, the one saving grace for these constant fumbles has always been that yeah,

9:57 these two core businesses probably won't be around forever,

10:01 but at least for now, they have been cash flow monsters that could finance a lot

10:05 of blunders with the eventual hope that something would work out.

10:08 But well, it's time to learn how many works to find

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11:21 Okay, so while it's fun to point and laugh at Meta's blenders over the years,

11:25 the annoying thing is that with the cash

11:26 flow from their ads business on Facebook and Instagram,

11:28 they were never really at any risk of running out of money.

11:31 And maybe eventually if they kept throwing money at new trends,

11:34 they could potentially get it right and fall ass

11:36 backwards into another core pillar to hold up their company.

11:39 But even that old safe assumption might be starting to change for a few reasons.

11:43 The first is all of these lawsuits.

11:46 Meta is currently being buried in legal challenges from every direction,

11:50 primarily revolving around the argument that their platform

11:52 was designed to be unreasonably addictive, especially to a young audience.

11:56 And at the same time as grabbing and holding people's attention,

11:59 they had a meaningful negative impact on their mental health.

12:02 Again, as a bit of foreshadowing,

12:04 these mental health problems were also allegedly exploited maliciously

12:07 or unwittingly by advertising algorithms

12:09 that targeted products towards distressed users.

12:12 Now, I am not a lawyer,

12:13 and while I did consult one while putting this video together,

12:16 you are going to get a much better

12:17 legal insight on these issues from other sources.

12:19 So, I will leave a link to those below

12:22 if you are interested in some light reading.

12:24 Even if they win legally, though,

12:25 from a business perspective, this is still a major threat.

12:28 The company already has major financial commitments related to its AI buildout,

12:32 so it's already milking its two reliable cash cows particularly hard.

12:36 Last quarter, its free cash flow came in at just $784 million,

12:40 down 91% from the year before.

12:43 Now, again, that $2.1 million precedent from the Los Angeles case is

12:47 almost certainly going to motivate a lot more people to come forward.

12:50 And with an existing president, it's going to be much harder to defend against.

12:54 There are already more than 3,000 similar cases consolidated in federal court,

12:58 thousands more coordinated in California,

13:00 and the next round of trials is scheduled for October.

13:03 I mean, honestly, if you're a young person that has used Facebook growing up,

13:07 you'd almost be dumb not to try and get something out of them, right?

13:10 Even Meta seems to agree.

13:12 Their latest quarterly report warns investors about the number

13:14 of youth related trials scheduled for this year,

13:17 which may ultimately result in a material loss.

13:19 This warning was also right next to the existing $2.4

13:22 billion in legal charges they booked in a single quarter.

13:26 And yeah, on top of this, that multi-state lawsuit

13:29 for $1.4 4 trillion might sound almost comically ownorous.

13:32 And to be fair, even the judge

13:34 overseeing the case has called that number unreasonable,

13:37 with the state's own lawyers conceding that something

13:39 closer to $200 billion is more realistic.

13:41 But uh I know it might not seem like it these days,

13:45 but $200 billion is still actually a lot of money.

13:48 Okay, so you know what isn't a lot of money for this company?

13:52 $17 billion.

13:53 Despite just paying out one of the largest legal settlements in history,

13:56 the company and its shareholders obviously still considered this a win

14:00 because their stock price shot up after the announcement.

14:03 If this was actually enforced,

14:04 this would be a massive hit for a company that has already promised

14:07 effectively all of its spare money for the next decade to data centers.

14:11 Even beyond just the money,

14:12 the much more damaging outcome is the potential for significant

14:15 reform in how the company is allowed to operate.

14:17 And we don't really need to speculate too hard

14:20 because it's kind of already happening over in Europe.

14:22 The EU is kind of doing God's work,

14:25 cracking down on algorithmically targeted advertising,

14:27 user tracking, and rules around young users.

14:29 There is a logical historical parallel here with tobacco companies,

14:32 who also built a different type of addictive and damaging product that got

14:36 a lot of people hooked before science in the law eventually caught up with them.

14:40 While obviously they are still around today,

14:42 and they are also kind of reinvesting into new technologies in their field,

14:45 they aren't nearly as dominant as they would be

14:47 if they had been left to their own devices.

14:49 Now, that's partially because of the fines,

14:52 but primarily because of new regulations about promoting

14:54 their products and the broad societal understanding that, oh yeah,

14:58 this stuff ain't great for you.

15:00 And hey, devil's advocate again.

15:01 Maybe you might be thinking this is all going too far.

15:05 But even for the people who are firmly in the camp

15:08 of individuals should be responsible for their own choices,

15:10 it's worth acknowledging that beyond the legal challenges,

15:12 Meta is doing a pretty damn good

15:15 job of undermining their platforms all by themselves.

15:17 The second big problem is that Facebook has

15:20 been well and truly and shouldified to the point

15:22 where it is genuinely hard to use it to actually just keep up with your friends.

15:26 According to court records from a lot of these same trials, by last year,

15:30 just 17% of time spent on Facebook

15:33 involved content from people's actual personal relationships.

15:35 On Instagram, it was 7%.

15:38 Zuckerberg himself testified that the friend part

15:40 of Facebook has gone down quite a bit.

15:43 Instead, it's an endless feed of ads,

15:45 boomer memes, Jason Derillo, for some reason,

15:48 and mostly engagementbased slop that doesn't exist

15:51 on any other platform with a decent algorithm.

15:53 Ironically, the AI that the company is chasing so wholeheartedly is

15:57 making this problem worse by further sloppy their already initified platform.

16:01 They literally launched an entire feed called uh

16:04 Vibes that is nothing but AI generated video.

16:07 You really just can't make this[ __] up.

16:10 Now, this is a problem everywhere, but in theory,

16:12 competitors like Tik Tok and YouTube maintain quality

16:15 metrics that rank videos on things beyond pure clickbait.

16:17 At least for now, I guess advertisers have seen this, and a lot

16:21 of brands are now hesitant to appear on the platform,

16:24 especially given the bad press it's getting

16:26 around all of this mental health stuff.

16:28 To make matters worse,

16:29 the advertisers who are thriving are mostly promoting complete scams.

16:32 Last November, Reuters got hold of internal documents showing

16:36 that Meta itself projected about 10% of its 2024 revenue,

16:40 roughly $16 billion, had come from ads for scams and banned goods.

16:44 Its own systems were estimated to be showing users

16:47 15 billion higher risk scam ads every single day.

16:50 And internal policy was to only ban an advertiser once

16:53 its systems were 95% sure they were running a scam.

16:56 Anybody below that threshold just got charged higher ad rates as a penalty,

17:00 which was really just a reward for the company itself.

17:03 The good news is that reporting won a Pulitzer Prize this year.

17:06 So, that's kind of cool.

17:08 The point is though,

17:09 this has further scared away real advertisers who don't want to be

17:12 positioned between Wish.com Iron Man suits and Tai Lopez's new 5-day seminar.

17:16 For now, revenue is still good because Facebook has the unique benefit

17:20 of highly identifying personal information willingly

17:22 handed over by most of its users.

17:24 But if there are restrictions put on that and if companies stop seeing that ROI,

17:29 it could easily lose this easy safety net

17:31 of money right as it needs it the most.

17:34 As a small-cale little test case,

17:35 when Apple simply let iPhone users opt out of tracking,

17:38 Meta itself estimated the change would cost

17:40 it about $10 billion in a single year.

17:43 So, is it likely to collapse completely?

17:45 Well, unfortunately not.

17:46 But it is in an infamously turbulent corner of the tech space.

17:51 The network effect of social media has worked in their favor for a long time,

17:55 but it can also work against them.

17:56 People go where their friends go.

17:58 And I mean, how many of you

18:00 actually have friends that still seriously use Facebook?

18:03 It's also worth noting the important little

18:05 commercial detail that people just[ __] hate Facebook.

18:08 Polling from Pew last year found that around twothirds of Americans

18:11 view Zuckerberg unfavorably with majorities of both parties agreeing on it.

18:15 So despite its rebrand,

18:17 it has somehow managed to piss off both sides of politics,

18:20 which might be the closest thing to bipartisan

18:22 consensus this country has produced in a decade.

18:24 Leniency for the sake of maintaining a brand isn't as likely

18:27 as it might be for companies that still have some supporters.

18:30 There is also really nothing stopping Facebook

18:33 or Instagram or WhatsApp being sold off to someone else or spun out

18:37 into their own companies to cover these financial shortfalls.

18:39 In a 2018 email that surfaced during the antitrust trial,

18:42 he wrote that there was a non-trivial chance the company

18:45 would be forced to spin out Instagram within a decade anyway.

18:48 So, I guess the point is Meta can probably

18:51 pay its way out of most of these problems individually.

18:53 The real question is whether it can afford

18:56 all of them from everywhere all at once.

18:58 Now, I don't want to get too caught up in wishful thinking,

19:01 but go and watch this video next to try

19:03 and figure out how this possibly ends well.

19:05 And don't forget to like and subscribe to keep on learning how money works.