Stock Market

The Threads Puzzle: Can Meta’s Social Media Strategy Deliver for Investors?

Meta Platforms (NASDAQ:META) stock is up 144% so far in 2023, and likely to head higher.

The gains in META stock are mostly based on speculation. Revenue for the first quarter was up only 3% from a year ago. Net income was down 24%. Analysts expect earnings to be down 15% for the year.

The first stage of Meta’s rise is obvious. Generative artificial intelligence will transform society. Meta is using an open source strategy to expand its development base there. Its large programming staff can do the rest.

The second stage is Threads. Most now see it as a Twitter-killer. But is it? Even if it is, would that be worth anything to investors?

Threads and META Stock

Threads is attached to Instagram, originally a picture-sharing service bought a decade ago for $1 billion. It has a reputation as the best place for social media marketing. Instagram is home to Reels, Meta’s version of TikTok.

Threads can destroy Twitter because it’s mismanaged Twitter under Tesla (NASDAQ:TSLA) CEO Elon Musk. Users want an alternative, which ought to bode well for META stock.

More important is that Threads can be profitable. Meta owns its own infrastructure, and profitably employs its own programmers. There is little incremental cost to running Threads since the resources are already in place, building and selling Meta’s other services.

Thread Threats

I have written elsewhere how Threads is open source. It will be compatible with an existing open source project, ActivityPub, and its most popular service, Mastodon.

This does not mean that if you have a Mastodon account, as I have, you’re going to be connected to Threads.

Most Mastodon instances are run by volunteers. Many are leery of both the firehose of traffic Threads represents and Meta’s ability to scoop up, and re-sell, ads based on the traffic.

Many, if not most, Mastodon instances will decline to connect or “federate” with Threads, and ways will be sought to wall-off the smaller service from the larger one.

Reputation matters in social networking. That of Meta CEO Mark Zuckerberg is little better than Musk’s.

The bigger threat is to Meta’s finances. Even before Musk’s purchase, Twitter was only marginally profitable. The cost of moderating debate on social media is extreme, as are the risks in fighting disinformation. Even defining the term is controversial, not just in the US.

Instagram head Adam Mosseri wants to sidestep the question, insisting Threads won’t replace Twitter and won’t court news stories or political discussion. Meta even yanked news stories from its services after a new Canadian law demanded it pay for the links.

The Bottom Line

Meta’s rise in 2023 has made it a speculative stock. Investors are paying 35 times earnings, for a company whose growth is slowing and whose profits are falling.

Threads won’t change that right away. It will provide incremental traffic and revenue. It will also create headaches management won’t be able to sidestep as easily as Mosseri thinks.

It’s no longer true that, on the Internet, no one knows you’re a dog. You can be found, and you can be jailed for what you say in many countries. Governments around the world are working hard to rein in the power of social media, and mass communication.

The future of META stock rests on its ability to ride those waves. The developing world needs Meta services to connect with the global economy. But even American stability is at risk from the resulting fallout.

I think Meta stock is overpriced here.

As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.