About a year ago, Disney followed Facebook down the enigma that is the "metaverse."
Now it's regretting that decision...
We've all heard of the metaverse. But most folks don't understand what it is – myself included.
The metaverse promises "an embodied internet where you're in the experience, not just looking at it." Here's what Disney's former chief executive officer, Bob Chapek, told his employees in an internal memo last year...
For nearly 100 years, our company has defined and re-defined entertainment by leveraging technology to bring stories to life in deeper, more impactful ways... We have an opportunity to connect those universes and create an entirely new paradigm for how audiences experience and engage with our stories... This is the so-called metaverse.
Disney made a small, but considerable investment in the metaverse. It assembled a team of 50 people to "develop metaverse strategies." (Your guess is as good as mine as to what that means.)
We recently found out that all 50 of those employees got the ax. After only a year of diving into the black hole that is the metaverse, Disney had enough. The company has eliminated its next-generation storytelling and consumer-experiences unit.
According to reports, the division had no real direction. It didn't know how to create the products it was tasked to create. Worse, it didn't know how to sell it to the public.
Disney is currently under pressure from investors to make cuts to nonessential businesses. Disney's metaverse division certainly falls in that category.
I call the metaverse a black hole... since that's what it seems like at the moment. It's a money pit.
Meta Platforms, the parent of Facebook and Instagram, has shifted billions of dollars in resources to the metaverse. Despite substantial investment, the company has only found low demand and widespread confusion among users who try to use the technology.
In total last year, Meta lost $13.7 billion in its Reality Labs division – the division for its metaverse operations. The consensus among analysts surveyed by FactSet is that Reality Labs will lose more than $17 billion in 2023 and $18.5 billion in 2024 .
Despite loss after loss, CEO Mark Zuckerberg remains optimistic. He expects the Reality Labs ecosystem to "grow significantly over the next few years."
While he sits around and waits for that growth, racking up losses in the meantime, we want nothing to do with the company as an investor.
And that's tough to say... Facebook used to be one of the greatest businesses on the planet.
Put simply, Facebook was the greatest advertiser the world had ever seen. Folks would sign up for Facebook, openly share everything about their lives, and Facebook could use that information to target them with ads. Growth was insane. And the company didn't have to do much at all to earn those advertising dollars... It just had to make sure its website and app didn't crash.
Facebook was what my friends on the Stansberry's Investment Advisory team call "capital efficient." This means the company scaled well, it didn't require a lot of capital expenditures to grow, and it had wide free-cash-flow ("FCF") margins – FCF as a percent of sales.
FCF margins used to be between 30% and 40%. Today, its FCF margin is only 16%. Meta is not the capital-efficient business it once was.
The commitment to the metaverse is a big reason why.
On the other hand, Disney cutting ties with its metaverse fantasy gives us hope. It's becoming committed to focusing on what it does best... content.
While Facebook used to have the greatest advertising business of all time, Disney still has (arguably) the most valuable intellectual property ("IP") in the world.
Think about characters like Mickey Mouse, Captain America, Darth Vader, and Buzz Lightyear... Think about brands like ESPN. Disney has so many valuable assets that it has seemingly endless opportunities to generate sales.
For example, Disney builds theme parks around its iconic characters. It makes movies and TV shows about them as well. It broadcasts sports games. And it can also sell Iron Man or Baby Yoda merchandise.
There's so much to Disney's business. Other companies can't compete with its timeless brands. That affords Disney a huge moat. Again, it all starts with its valuable IP.
Disney got away from what made it one of the best companies you could ever own. But now the company is refocusing... It's cutting jobs so that Disney can do what it does best.
While Meta Platforms slugs through the black hole that is the metaverse, we're going to keep our distance as an investor. But we're going to look for signs to buy Disney, as it seems to be headed in the right direction.
What We're Reading...
- Something different: 100-year-old sisters share four tips for staying mentally sharp as you age and it's not crossword puzzles.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 29, 2023