Quality Investing with René Sellmann

Quality Investing with René Sellmann

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Quality Investing with René Sellmann
Quality Investing with René Sellmann
Playing Devil’s Advocate: What Could Derail Meta’s Growth?
Strategic Stock Commentary

Playing Devil’s Advocate: What Could Derail Meta’s Growth?

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Rene
Dec 28, 2024
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Quality Investing with René Sellmann
Quality Investing with René Sellmann
Playing Devil’s Advocate: What Could Derail Meta’s Growth?
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In my previous blog post titled “Meta's Path to a $10 Trillion Market Capitalization: A Bold Thought Experiment?“, I delved into a thought experiment exploring the potential for Meta Platforms (formerly Facebook) to achieve a $10 trillion market capitalization.

While that analysis painted a picture of opportunity, it’s only half the story!

To guard against confirmation bias and maintain intellectual honesty, investors must also always examine and be acutely aware of the counterarguments and risks—some existential—that could derail Meta’s trajectory.

The intent of this post is in no way to predict doom but to balance optimism with caution. Once you start investing significant sums of money (a multiple of your annual savings rate), the stakes are high, and so are the risks.

Hence, here are 6 risks to be aware of:

1. The TikTok Threat: Disruption Could Be Only a Swipe Away!

The meteoric rise of TikTok serves as a stark reminder of how quickly new social media platforms can upend the status quo.

TikTok’s unique value proposition—a focus on algorithmically curated short-form video—, which quickly gained widespread popularity, exposed how fragile Meta’s position as THE dominant social media company can be and forced it to adapt rapidly (e.g., launching Reels).

The success of TikTok was one of the contributing factors leading to the 76% (!) decline in Meta’s stock.

Going forward, Meta faces two significant challenges:

  • Adaptability vs. Profitability: The transition periods to counter such threats can come at the cost of lower profitability. For example, newer ad monetization strategies on Reels for quite a long time generated lower revenue per user than legacy products like Instagram Stories.

  • Revenue Concentration Risk: Today, almost 100% of Meta’s revenue is derived from advertising. A platform-level disruption that siphons off user attention could threaten not just one product but the entire company.

Counterpositioned platforms like TikTok highlight Meta’s vulnerability to external competition, particularly as user preferences shift. This demands constant vigilance and innovation to stay ahead (which fwiw is one of the reasons I’m invested in Meta).

This a great transition to the second key risk …

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2. Key Man Risk: The Zuckerberg Dependency

Mark Zuckerberg has been the engine driving Meta’s innovation, growth, and relentless ambition for nearly two decades. His seemingly endless ambition and willingness to take audacious bets, such as the pivot to the metaverse, has shaped Meta’s culture.

However, this dependence comes with risks:

  • Focus and Commitment: Should Zuckerberg lose interest in the day-to-day operations of Meta or divert his energy elsewhere, the company’s “move fast and break things” ethos could falter.

("Move fast and break things" - Mark Zuckerberg onstage at the F8 conference 2014.)

  • Leadership Transition Risk: If an unexpected event sidelines Zuckerberg (cue: his MMA passion is something to be aware of), the company could struggle to maintain strategic momentum. Investors often underestimate the role of visionary leaders in sustaining innovation cycles.

Meta hopefully has an emergency succession plan (but then again, the C-suite of Meta is excellent and filled with many executives who have been with the company forever and that, for instance in the case of Andrew "Boz" Bosworth, share the visionary thinking of Zuck (I recommend checking out his podcast).

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