About a year ago, Disney (DIS) followed Facebook into 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. That's part of the problem.
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.)
Recently, the Wall Street Journal reported 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.
I describe the metaverse as a black hole because, at least for the moment, that's what it is. It's nothing but a money pit.
Today, I'll explain why. We'll discuss what this move means for Disney – and for investors...
Disney called its doomed metaverse team the "next-generation storytelling and consumer-experiences unit."
According to the press, 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 them to the public.
Investors have been urging Disney to make cuts to nonessential businesses. The metaverse division certainly fell into that category...
Meta Platforms (META), 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, Meta 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 investors.
And that's tough to say... After all, 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 the company could use that information to target them with ads. Growth was insane. And Facebook 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 our colleagues at Stansberry's Investment Advisory would call "capital efficient." The company scaled well, didn't require a lot of capital expenditures to grow, and had wide free-cash-flow ("FCF") margins – that is, FCF as a percent of sales.
Its FCF margin used to be between 30% and 40%. Today, it's 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. The entertainment giant is 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.
Other companies can't compete with those timeless brands. That affords Disney a huge moat. Again, it all starts with its valuable IP.
Disney strayed 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 it can get back to doing what it does best.
While Meta Platforms slogs through the black hole that is the metaverse, investors should keep their distance. But look for signs to buy Disney... It seems to be headed in the right direction.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
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