Meta can't make any big acquisitions right now, as its $40 billion war chest starts going towards appeasing Wall Street investors
- Meta is repurchasing $40 billion worth of stock from investors, even as it cuts jobs.
- It's a move designed to prop up its share price, as its business and revenue growth stumble.
Meta used to put its money towards fun things like employee perks, the metaverse, and acquisition binges. But as Meta's "year of efficiency" continues, Mark Zuckerberg needs to put its $40.74 billion cash pile to a more boring — but perhaps more practical — use: making shareholders happy.
Since 2012, Meta Platforms, formerly called Facebook, has acquired over 100 companies, including big names like WhatsApp, Instagram, and Oculus. Those acquisitions helped Meta mushroom into the internet behemoth it is today.
The social networking giant's revenue has ballooned over the years from $5 billion in 2012 to $116 billion last year. As its revenue has grown, so too has its stockpiles of capital: In its February earnings report, Meta said that it had $40.74 billion in "Cash, cash equivalents, and marketable securities" as of December 31st, 2022.
But as Meta's revenue growth stalls out, its stock price struggles, and external pressures catch up to it, that money now has to go towards stock buybacks and other maneuvers that have more to do with its financial health and less to do with innovation.
Meta can't do big acquisitions, and it needs to win over Wall Street
Antitrust scrutiny continues to be a thorn in its side when it comes to acquisitions. Investors aren't interested in funding the metaverse push at the expense of profits. The economic environment remains uncertain; and the pandemic tech bubble has finally burst and shifted Meta's numbers towards pre-pandemic levels.
After peaking in 2021 during the height of the tech bubble, the company's stock has slid from nearly $400 per share to a little over $200, around the value it held pre-pandemic. To help soothe worries over its share price, the company announced earlier this year that it would purchase $40 billion worth of shares from investors. The idea would be to help prop up its value, while also making up for the bad timing of its recent stock buybacks.
UBS stock analyst Lloyd Walmsley told Insider that the "buyback is a natural course" for a company flush with a lot of cash, but that also has so much antitrust scrutiny that it would be especially difficult to make any huge acquisitions. Walmsley was referring to the Federal Trade Commission's skepticism of major tech mergers under the Biden administration.
Angelo Zino, senior equity analyst at CFRA Research, agrees that he expects Meta to steer clear of any major acquisitions for a while, saying that "the political landscape likely prevents Big Tech from getting bigger."
The FTC sued Meta last July over its acquisition of Within, a virtual reality fitness app, accusing Meta of buying up too many VR competitors and stifling competition in emerging markets. Despite a judge's approval of the deal in February, the suit has put a bit of fear in the industry as it helps to forge a path to more cases against Big Tech. Since Meta just settled with the FTC for $5 billion in 2019 over a separate matter, it's not looking to poke the bear.
Instead, the cash that might have ordinarily gone towards those kinds of big deals might go straight back to investors, to help renew its appeal to Wall Street.
"We see a possibility that Meta could initiate a small dividend to attract a new class of investors," said Zino.
Wall Street needs some convincing on Meta's future
The moves to appease Wall Street might be well-timed, given the way that Wall Street has pressured Meta to cut costs, including via its major layoffs of the last several months.
In November, Meta started laying off 13% of the company, and in March announced another 10,000 would be given the boot. The metaverse, Meta CEO Mark Zuckerberg's big bet for the future, used to have tens of billions of dollars pumped into it, helping finance acquisitions like that of Within.
But investors successfully compelled Meta to pull back on that too, especially after seeing Meta's free cash flow peak at $38.4 billion in 2021 and then drop to $18.4 billion at the end of 2022.
Ultimately, investors want to see Meta making smarter bets given the challenges facing its business.
"Meta's revenue potential is likely to be most challenged among the mega cap tech names during uncertain macro times and competitive pressures," Zino wrote in a note to clients this week.
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