Is Facebook (META) finished?

For years, it had been nearly a “perfect stock.” Not only did it appreciate 1,200%. META marched higher with great consistency… gaining ground every year from 2012 to 2021, except one.

Now it’s getting ripped to shreds.

Earlier this year, Facebook set a record for the largest one-day drop in value in stock market history.

Its stock has fallen 60% since last September... and is having its worst year ever.

It’s given back nearly every penny of gains it handed out in the last five years.

• If you’ve been following RiskHedge, this story should look familiar…

Last week, I showed you a pattern that plays out time and again with disruptor stocks.

It’s called the lifecycle of disruptive businesses.

Disruptors invent the future and create new technologies. You can make a lot of money backing these companies when they’re changing the world... in the early stages of their lifecycle.

But owning these stocks when they reach the pivotal “maturity” stage can be dangerous to your wealth.

That’s where Facebook finds itself today...

And investors are treating the company like it’s already dead in the water.

But as I’ll show you… there’s a surprising twist to Facebook’s story that could help it become a dominant stock again. If you agree with my analysis, this is a chance to buy a dominant disruptor at fire-sale prices.

• Truly great disruptors reinvent themselves.

Take Microsoft (MSFT). It’s the only firm to stay atop the top 10 companies by market cap over the past three decades.

And here’s the key:

The Microsoft of 2000 looks nothing like today’s Microsoft.

Back in 2000, it made most of its money selling operating systems like Windows 98. This was a rapidly growing business as tens of millions of people bought their first desktop PC.

But PC sales peaked in 2010 and have been falling ever since. This would have been the end of the road for most disruptors… but not Microsoft. It reinvented itself by pivoting to “cloud computing.”

Remember when its Office software came in shrink-wrapped CD boxes? Buying “Office 2003” or “Office 2007” meant driving to Best Buy or Walmart.

But in 2014, Microsoft switched things up. It began selling subscriptions to its software over the internet. Instead of paying a one-time $350 fee for the physical CD… you could access Office for $99 a year through the web.

Today, over 300 million folks pay to use Office online. Microsoft now gets most of its revenues from its cloud business… which didn’t exist 10 years ago.

Last week, I showed you how Amazon also reinvented itself when it launched its cloud division. Last year, Amazon’s “computing power” rental arm made up 75% of its profits!

• Facebook faces a harsh reality today...

At its core, Facebook is an advertising company. It became an all-time great business selling digital ads.

It raked in $117 billion last year showing ads to its users. That’s a 100X increase in sales over the past decade.

But now that business is entering its maturity phase. Facebook’s revenue shrank for the first time ever this quarter.

Simply put, Facebook is at a crossroads: it needs to reinvent itself...

Something it’s done many times before.

• Facebook has always been in the ad business... but it’s found new ways to make money from ads over and over again.

Facebook was founded before smartphones took off. When iPhone sales exploded, it pivoted to mobile. Today, over 80% of its revenues come from showing ads to mobile users.

A few years later, Facebook understood “visual social media” was the next big thing. It bought photo and video sharing app Instagram for $1 billion. Instagram raked in an estimated $45 billion last year. That’s roughly 40% of Facebook’s revenues.

Remember sky-high cell phone bills? You had to pay for every text message... overseas calls cost a fortune. Then WhatsApp came along and made talking with family and friends from anywhere in the world free.

Facebook bought WhatsApp almost a decade ago. Last year, it made roughly $9 billion showing ads to its two billion users.

Facebook has reinvented its ad business multiple times by being early to disruptive trends.

• CEO Mark Zuckerberg is betting the company on a new advertising frontier.

Facebook announced it’s becoming a metaverse company late last year.

Regular readers know how big the metaverse is going to be. I’ve been writing about it since February of last year. In short, the metaverse is the new and exciting “3D” version of the internet.

Here’s the key: The metaverse is the next frontier for the $580 billion ad market. Facebook knows this. That’s why Zuckerberg is betting the company on this disruptive trend.

Popular virtual worlds will be a goldmine for advertisers.

Marketers want to place their ads where the most people will see them. As game-like worlds become the new hangout spot for billions of people, they will attract a lot of ad dollars.

Roughly 330,000 people walk through Times Square each day. That’s why it costs $5,000+ per hour to show your ad there. Imagine how many eyeballs would see a billboard in a popular virtual world? A well-placed ad could reach millions of folks daily, all around the globe.

That’s why some of the world’s largest marketers like Procter & Gamble, Adidas, Louis Vuitton, and Gucci are already advertising in virtual worlds.

• Many think Zuckerberg’s metaverse pivot is a desperate effort to save the firm.

Folks ridiculed Facebook when it coughed up a billion dollars for a photo app…

Now Instagram rakes in tens of billions of dollars a year.

Others laughed when it bought a free messaging service for $17 billion…

Yet Facebook has made many times its money on WhatsApp.

To be clear, there’s a lot I don’t like about Facebook. I don’t use it. We all know spending too much time on social media is toxic. But as an investor, you must separate your emotions from the facts. And you can’t ignore the fact that Facebook successfully reinvented itself many times before... and is doing it again today.

Investors are treating Facebook like it has zero chance of pulling off another pivot. The stock is trading at its cheapest valuation relative to profits ever.

That’s creating opportunity.

Remember, the best disruptors like Amazon and Microsoft reinvent themselves time and again to stay on top. Facebook’s done it before. There’s a good chance it can pull it off again… and join the ranks of all-time great stocks.

Stephen McBride
Editor — Disruption Investor