Will Meta Platforms Face The “China Problem” Soon? ?

Meta Platforms, the Menlo Park-based social media giant run by Mark Zuckerberg, had its worst stock market year in 2022. At this time when the crisis in the advertising sector affects the morale of investors and the financial performance of the company; rising costs to build virtual worlds technology added to already subdued shareholder sentiment. In 2023, the company will face another challenge because, according to Zuckerberg’s statements, he intends to ultimately transform Meta into a company focused on new technologies and devices that enable virtual reality interaction. . The problem is that nearly 100% of the company’s devices, such as the Oculus VR headset, are made in the US and… probably China, which also contradicts Zuckerberg. This could be very costly for the Meta.

Too good to be true

In 2016, Zuckerberg posted photos of himself in Beijing’s Tiananmen Square online and gave a speech in Mandarin to “buy into the good graces” of the Chinese people and ruling class. But the country ultimately rejected the efforts of Facebook and many other American consumer technology companies, relying on local players to consolidate their power and reduce dependence on the “West”. As a result, by 2018, many companies had abandoned their efforts to debut in China. In 2019, Zuckerberg himself admitted that the Chinese dream is over. Since then, he has repeatedly expressed his distaste for the idea of ​​a “Chinese Internet”; he considered it contrary to American democratic values. Speaking before the US Congress, he warned against Chinese companies stealing “American technology” and warned of the threat of rapidly growing competition from China-linked ByteDance, TikTok. At the same time, however, the company has done nothing to diversify its supply chains, as Apple and other American technology companies that use Taiwan, Thailand or India have tried to do for years. As a result, the company remained completely dependent on China for technological devices.

A trade war?

Some analysts in the tech world worry that China wants 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 had to look for ways to move production to Taiwan, an advanced precision and technology industry, to avoid “Made in China” and save on customs duties, but the China-based supply chain prevented it. . Likewise, with Ray-Ban, it failed to write “Made in Italy” on smart glasses, and efforts to move production from Oculus to Taiwan were unsuccessful.

It appears that China has strong leverage over Zuckerberg, and of course it may or may not be used. This certainly poses an additional risk to the company’s shareholders. While China was not important to the company until recently because of its focus on social media and advertising, it has become crucial today, as Zuckerberg has confirmed with spending on an unprecedented scale, as it moves toward new technologies that enable “metaversion.” Localization of production seems even more dangerous given Meta’s political stakes, such as its funding of TikTok and AmericanEdge, known for its campaigns and ads criticizing Chinese authorities. The company’s policy has been repeatedly criticized in China.

Change comes from pain

Zuckerberg’s business is facing unprecedented challenges. Currently, they are bound by global concerns about consumer health and recession, as the advertising business remains the company’s main source of revenue. They also have a perspective and a psychological dimension, because the concept of the Metaverse presented by Zuckerberg still sounds abstract and profitable; Media Meta reports on reckless spending by employees of the department that develops new technologies for Reality Labs. On top of all this, concerns about China’s wiretapping are emerging from the shadows; we will probably hear about it more than once. A move from China could halt Meta’s tech expansion in a potentially “reverse, not forward” direction, as the company isn’t the only mega-tech in the market moving toward virtual reality. This trend is also evident in Apple and Microsoft. If Meta were considered low risk today, its shares would still be as expensive as they were in the fall of 2021. Today, sales deter some and encourage others to buy.

As for Meta’s business, the company has Facebook’s almost 3 billion user base, making it one of the top choices for advertisers, including the Chinese, who have paid the company large sums of money to place ads and reach them. global market. Meta, of course, is not only Facebook, but also Instagram and WhatsApp. In addition, the company continues to develop its technology, introducing popular VR devices, Oculus headsets. Zuckerberg decided to focus on technology, possibly because he felt the social platforms business was destined for slow growth due to the scale the company had reached. The next few years will tell if it will create another “goose that lays the golden egg” and we will fall into virtual worlds that resemble reality, allowing the company to regain its fortunes and dominance.

Meta Platforms (META.US), D1. Looking at the company’s share price, we can see that the SMA100 average (black color) levels around $132 per share, potentially becoming short-term resistance. On the other hand, the key medium-term resistance is the 200 SMA (red color), which coincides with the 23.6% Fibonacci retracement of the bearish wave that started in September 2021. The nearest potential strong support is at the $100 psychological level. per share. Breaking the price below can open new lows. Source: xStation5

Eryk Szmyd Financial Markets Analyst XTB

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