KAMPALA – On 3rd February 2022, Facebook now going by the corporate name Meta Platforms Inc., since October 2021, and trading on the Nasdaq under the stock symbol — FB, underwent an unheard-of nose-dive in their share price and market valuation.
At the close of the trading day on 2nd February 2022, Facebook’s share price per share was $323. The next day, the share price had dropped to $237 signalling a 26% plunge in equity and market capitalization.
Facebook’s market valuation dropped from over $879 billion to an ignoble $647 billion leaving a dent of nearly $30 billion in Mark Zuckerberg’s (CEO, Founder) networth; and a $232 billion decline in the corporation’s market valuation.
The plausible explanation for this drop — Form 10-K.
On the 2nd February 2022, Meta Platforms Inc. issued a press release and held a press conference in respect to its financial results for the fourth quarter and full-year ended 31st December 2021. This mandatory report is formally known as the 10-K form.
The conference call/webcast was held at 2pm Pacific time, 5pm Eastern time. Meaning, it (webcast) was held after equities trading on the Nasdaq had closed on both the East, and West coast. And Facebook is listed on the Nasdaq.
Because the 10-K form; and its accompanying 8-K report (that were both released by Facebook on the same day), are known to provide unfiltered, unguarded information for investors and research; the language used in compiling these reports paints a pragmatic and most times, glum picture of corporations, in a bid to manage expectations of the shareholders, investors, and to fulfil legal regulatory requirements.
Such was the effect of the press release of Facebook’s form 10-k, as it sent shock waves through investors, shareholders, researchers; and analysts eventually ending in a colossal drop in share price and market capitalization for Facebook.
The financial report raised a lot of talking points that shouldn’t be brushed off.
Before I delve into any of them, I’d like to make one thing clear — Facebook’s financials check out and it’s still ahead of the pack in its niche.
Facebook’s revenue from its family of Apps (Facebook, Instagram, Messenger, WhatsApp) was over $115 billion, a 36% increase from the previous year by over $30 billion.
It (Facebook’s) advertising revenue stood at more than $114 billion, that is, a 37% raise north of $30 billion from 2020. Net income was up by $10.2 billion; whereas total assets shot up by $6.6 billion, both from the previous year — 2020.
Also, Facebook’s daily active users went up by 5%, while the monthly active users upped by 4%; all in comparison to December of 2020.
Besides the systematic risks that come with the business — lawsuits, competition, uncertainty, government restrictions, and the like, Meta Platforms Inc. is in the clear.
However, the report raised red-flags that shouldn’t be passed over.
Particularly the flawed structure of Facebook’s capital stock. Its capital structure is divided into Class A and Class B stock. Class A stock is the stock floated on the Nasdaq and Class B stock is held by executive officers, employees, directors, and their affiliates.
Meta platforms Inc. is considered a “controlled company” by Nasdaq because the majority of its board isn’t independent, neither do they have an independent nomination function.
This, the corporation acknowledges makes its floated shares less attractive to investors and harms their share price.
As of 31st December 2021, there were 3,258 Class A Facebook shareholders, and 32 Class B stockholders. Class A shareholders hold one vote per share; and Class B shareholders, hold ten votes for each share.
What’s more, growing research has shown that companies with a multi-class structure generally underperform those without in the mid/long term. Multi class structured companies generally lose their advantage over those that aren’t in six to nine years of their initial public offering (IPO).
Additionally, Meta states that they have never declared cash dividends on their stock, and they intend to retain future earnings, to finance operations and for the expansion of the business. ‘We do not intend to pay cash dividends for the foreseeable future,’ Meta’s report ratifies.
This defies the logic of investing in Facebook’s equity because; first, they have never, and don’t intend to pay dividends, and second, they acknowledge how ‘unattractive’ their stock is because of their governance structure. Therefore, even if they retained earnings for reinvestment, it’s most likely not going to have a positive bearing on the share price if the corporate governance structure isn’t ironed-out.
Another cause for concern is Facebook’s voting rights. The corporation doesn’t have an independent board. Mark Zuckerberg — CEO and founder who owns 13% of the company, also owns 60% of its voting rights. This has been branded — corporate dictatorship.
‘Our CEO is a party to a voting agreement with Dustin Moskovitz and certain of his affiliates. The stockholders party to this agreement have agreed to vote all of their shares as directed by, and granted an irrevocable proxy to, Mr. Zuckerberg at his discretion…’ reports the document. Dustin Moskovitz is one of the co-founders of Facebook.
In the past, Facebook’s shareholders have ‘revolted’ to reduce their CEO’s power: In 2017 the percentage of shareholders at Facebook that voted in support of an independent board, was 51%, and in 2019, it went up to 68%.
As it is, both attempts were unsuccessful because as per the standing voting agreement at Meta; no one can out vote Zuckerberg and his cohort on sensitive matters, and out of the chairmanship because it’s estimated they hold about 70% of all voting shares at Meta Platforms Inc.
Earnestly, Meta platforms Inc. stores data of billions of users; past and present across its platforms, and the thought of it being under the discretion of one man’s superintendence is egregious.
Alphabet (Google), Apple, Microsoft, Autodesk all have independent boards — if it’s working well for them, it can work well for Meta too.
Mark Kidamba is an Independent Financial/Investment Analyst