Will Meta Platforms face big 'Chinese problem' ? 🔌

The stock of Meta Platforms, the Menlo Park-based social media giant controlled by Mark Zuckerberg, in 2022 has had its worst stock market year to date. During it, where the crisis in the advertising sector has weighed on investor sentiment and the company's financial performance; rising spending on building virtual worlds technology has only exacerbated the already souring shareholder sentiment. In 2023, the company will face another set of challenges because, according to Zuckerberg's statements, it ultimately intends to transform Meta into a company focused on new technologies and devices that enable interaction in the virtual reality. The problem is that almost 100% of the company's devices like Oculus VR headsets, are manufactured in China, which are in conflict with the US and ... probably Zuckerberg also. This could prove to be very costly for Meta.

Too good to be true

In 2016, Zuckerberg posted photos of himself online in Beijing's Tiananmen Square and gave a speech in Mandarin, quite as if he wanted to 'buy into the good graces' of the people and ruling class from China. But the country eventually rejected the efforts of Facebook and many other US consumer technology companies, relying on homegrown players that allowed them to consolidate power and reduce dependence on the 'West.' As a result, by 2018, many companies had abandoned efforts around debuting in China. In 2019, Zuckerberg himself admitted that the Chinese dream was over. Since then, he has repeatedly indicated that he doesn't like the vision of the 'Chinese Internet'; he judged it to be contrary to democratic, American values. Speaking in the U.S. Congress, he warned of Chinese companies stealing 'American technology' and warned of the danger of fast-growing competition from the Chinese-linked ByteDance, TikTok. At the same time, however, the company did nothing to diversify its supply chains, just as Apple and other U.S. technology companies using Taiwan, Thailand or India have tried to do for many years. As a result, the company has remained fully dependent on China in the context of technology devices.

A trade war?

Some analysts in the new technology world fear that China will want to stop the growth of Zuckerberg's empire, and that the transfer of production of advanced VR devices is not a matter of one or even two years. Meta Platforms was supposed to look for ways to move production to Taiwan, which has a developed precision and technology industry, to avoid 'Made in China' and save on customs duties, but was prevented from doing so by a localized supply chain in China. Similarly, it was unable to put 'Made in Italy' on smart glasses with Ray-Ban, and efforts to move production of Oculus to Taiwan proved futile.

It appears that China has a powerful leverage over Zuckerberg and may or may not take advantage of it, of course. This undoubtedly represents an additional risk for the company's shareholders. While until recently the China issue was not important for the company as it focused on social media and advertising, today it has become very important as Zuckerberg has confirmed with an unprecedented scale of spending that he is moving towards new technologies enabling 'metaversion'. The localization of production seems all the more dangerous given political issues like Meta's funding of AmericanEdge, an organization known for running campaigns and ads critical of TikTok and the Chinese authorities. The company's policies have repeatedly come under criticism in China.

Change is born in pain

Zuckerberg's company appears to be facing unprecedented challenges. Currently, they have to do with global concerns about consumer health and recession because the advertising sector is still the company's main source of revenue. They also have a forward-looking and psychological dimension because the Metaverse concept presented by Zuckerberg still sounds abstract and unprofitable; the media is circulating news of reckless spending by employees of the department developing new technologies for Meta, Reality Labs. On top of all this, concerns about the China thread are coming out of the shadows; we will probably hear about it more than once.  A blow from China could potentially put a halt to Meta's technological expansion along the lines of 'he who doesn't move forward, moves backward,' as the company is not the only mega-tec in the market moving toward VR. This trend is also evident with Apple and Microsoft. If Meta were seen as low-risk today, its stock would still be expensive as it is in the fall of 2021. The sell-off today deters some, encourages others to buy.

Looking at Meta's business itself, however, the company has a Facebook user base of nearly 3 billion users, making it one of the first choices for advertisers, including Chinese ones, who paid the company huge amounts of money to be able to place ads to reach a global market. Meta is, of course, not only Facebook, it is also Instagram and WhatsApp. In addition, the company provides highly rated VR devices, Oculus headsets, whose technology it continues to develop. Since Zuckerberg probably felt that the social platform business was doomed to slow growth due to the scale the company had achieved, he decided to focus on technology. The next few years will show whether he will create another 'golden child' and whether we will land in virtual worlds that resemble reality to the extreme, allowing the company to make another fortune.

Meta Platforms (META.US) shares, D1 interval. Looking at the company's stock price, we can see that the levels of the SMA100 average (black colour), around $132 per share, could potentially become short-term resistance. The key medium-term resistance, on the other hand, is the SMA200 average (red colour), which coincides with the 23.6 Fibonacci retracement of the bearish wave started in September 2021. The nearest, potentially strong support is located at the psychological level of $100 per share. Breaking the price below it, could open the way to new lows. Source: xStation5

Eryk Szmyd Financial Markets Analyst XTB