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In the metaverse, no one can hear you scream.
That shriek shareholders heard this past week was not only caused by the deep dive in Meta Platforms’ (NASDAQ:FB) market cap after it reported poor earnings and guidance, but an ear-piercing sound as a result of an elevated buyback that left some bewildered.
While the more than $220 billion decline may go down as the largest drop in value in stock market history, market capitalizations fluctuate. However, the company may have made an even more egregious error that has largely gone unnoticed: spending nearly $20 billion in actual cash on share repurchases during the fourth quarter of last year that provided little, if any value.
During the period between last October and December, the Mark Zuckerberg-led Meta (FB) spent $19.2 billion buying back company stock, significantly larger than the $10 billion that Morgan Stanley analyst Brian Nowak estimated. That helped bring down the average diluted share count 3% year-over-year.
According to the company’s annual report filed with the Securities and Exchange Commission, Meta (FB) bought back 21.7 million shares in October at an average price of $326.20, and in November, it purchased 21.6 million more shares, at an average price of $335.09. Lastly, in December, it bought back 14.73 million shares at an average of $329.97.
Altogether, Meta spent the final three months of 2021 buying bac 58 million shares of stock at prices that might not be seen again for months, perhaps years.
To put Meta’s purchases in a little more context, the company’s shares closed at $237.09 on Friday, and are now down 30% since the start of the year.
Share repurchases may be seen as “shareholder friendliness,” as Nowak pointed out – and they usually are, if a company has too much cash on its hands after running its business. But, buying back an elevated amount of stock during a quarter, only to have that period’s results destroy nearly 25% of the company’s value can look like a colossal waste of money.
For context, Meta bought back roughly $24.5 billion in the first three quarters of 2021 combined. So to spend $19.2 billion, or roughly 1.5 times the “record-high repurchase amount” it spent during the third-quarter, according to Evercore ISI analyst Mark Mahaney, is eye opening, to say the least.
The sizable share repurchase amount is given added scrutiny, especially when Meta has conceded that it is being hampered via three different avenues: ByteDance (BDNCE) TikTok is competing with it for attention; Apple’s (NASDAQ:AAPL) iOS changes are hurting the effectiveness of Meta’s advertising, causing it to rebuild its ad infrastructure, according to Chief Operating Officer Sheryl Sandberg; and lastly, its own products, like Reels, are seeing increased engagement over other products, but Reels presently monetizes at a lesser rate than News Feed or Stories.
It’s possible that Meta will be able to overcome these headwinds, though Nowak said that is more likely to occur over the long-term. For the time being, however, Nowak said there could be some “uncertainty around near-term ‘22 ad revenue estimates” as the company focuses on Reels engagement and not monetization.
The nearly $20 billion spent on buybacks could also have been spent in a variety of different manners, including ramping up spending in the metaverse that Zuckerberg has talked so much about, and which caused the company to change course last year after being primarily known as a social network.
Meta is not going to go broke anytime soon, as it ended the quarter with roughly $48 billion in cash and equivalents and generated $12.7 billion in free cash flow. But, J.P. Morgan analyst Mark Mahaney sad there is now a “dramatic fundamentals gap” between Meta and its closest competitor in advertising, Alphabet (NASDAQ:GOOG).
And with Mahaney conceding that “FB is now facing a [Netflix]-like negative inflection point” and the stock “could well be dead money for several months,” it seems foolish of the company to have spent $20 billion on stock buybacks that ultimately, provided little, if any value to shareholders.
Last month, the European Union approved Meta Platform’s (FB) acquisition of Kustomer, a customer-service startup that competes with the likes of Zendesk (NYSE:ZEN).