Of all the money ‘invested’ in Meta ads by DTC brands, would they have been better off just buying Meta stock?
A friend who is an experienced investment banker focused on consumer brands told me about a conversation he had with an investor a couple years ago.
“We don’t invest in companies like those because ultimately the largest economic benefit from the investment accrues to Meta, not the company and the investor.”
By ‘those companies’ the investor meant DTC and ecommerce companies with a heavy focus on advertising and in particular advertising on Meta. From the investor’s perspective, there are a lot of places she could put her money. So, if a big chunk of the investors’ money is advertising and those ad dollars have more benefit to Meta than to the ecomm company, what’s the point?
In other words, why not just buy Meta stock instead of Company A stock whose business model is predicated on buying services from Meta?
You can quickly fall down the rabbit hole. What about Shopify? Aren’t ecomm companies predicated on buying services from Shopify? Why not just buy Shopify stock? While I think a lot of investors concluded that was the way to play ecomm, the answer is that presumably Ecomm Company A can use capital to buy services from a lot of different companies, put it through their magic sauce machine and crank out more economic value than just buying stock in the various providers.
But how do we actually test this and move from theory to something concrete?
I am going to pick on Allbirds and run a thought experiment.
Let’s say that on the last trading day of every quarter Allbirds had taken a third of their marketing budget and bought META stock. What would the value of that META stock be?
More than the Allbirds market cap.
Yikes.
Of course there are flaws with this simple analysis such as the timing of the buying of META stock and the percentage marketing budget allocated. What would have happened to Allbirds if a third of their marketing spend was lopped off? Given Allbirds, you could make the argument that constraint would have forced them to face the music sooner and improve. And you could say it’s easy to pick on Allbirds. But is Allbirds really an outlier?
But zooming back out, to the investors’ view, there is an interesting question to ask yourself and an interesting analysis to do. Can your business model outperform just using your ad spend to buy META stock?