What’s in a name? For Facebook Inc. (ticker: FB), which is morphing into Meta Platforms Inc. (MVRS), it’s the future.
The name Facebook has been a huge part of the evolution of social media that has shaped society and democracy. Now, the company, which announced the name change in October and will start trading under the new ticker symbol on Dec. 1, is hitching its wagon to the next generation of the internet and digital social interaction: the metaverse.
As the next major step in how humans interact with each other digitally, the envisioned immersive computer-generated 3D world will rely on virtual reality and augmented reality technology, offering Meta a new growth opportunity beyond the advertising revenue it is so dependent on now.
But along with any opportunity, there are risks involved. Will the metaverse become as ubiquitous as traditional social media is today? In the meantime, as the metaverse develops, what about the here-and-now risks to Meta from increased competition, privacy issues and questions about its impacts on society?
Before delving into those questions to try to figure out whether Meta is a good investing opportunity, it’s worthwhile to remember how the company got to where it is. After all, if CEO Mark Zuckerberg turns out to be as much of a visionary about the metaverse as he was about the rise of traditional social media, that could keep his company in growth mode for years to come.
Meta Stock at a Glance
The story of Facebook is a familiar one by now: As a brilliant young Harvard student, Zuckerberg created a website in his dorm room in February 2004 and allowed only Ivy League students access. From there, he watched his creation explode in popularity. By 2007, Facebook garnered a valuation of $15 billion; and by 2010, it was worth $41 billion. When the company went public in May 2012 at $38 a share, it was worth a staggering $104 billion.
The company had more than 1 billion monthly active users by December 2012. Even more important, Facebook acquired Instagram for $1 billion in August 2012, which at the time had a little more than 100 million registered users. Today the platform has more than 1 billion and counting. Instagram’s focus on photographs and mobile users not only proved prescient but also paired well with Facebook’s growing mobile base: In the third quarter of 2019, the last period for which the company released such data, 94% of Facebook’s advertising revenue came from mobile users.
Finding up-and-coming companies with services that complement its own was an effective strategy for Facebook. Following its purchase of Instagram, FB acquired WhatsApp in 2014 for $19 billion. Back then, WhatsApp was one of the fastest-growing companies in the world, and Facebook was happy to not only gain an incredibly popular new service but also remove WhatsApp as a competitor for Facebook Messenger.
This, too, would prove to be a shrewd move for Facebook and its family of apps. According to App Annie, the four most downloaded apps in the world from 2010 to 2019 were Facebook, Facebook Messenger, WhatsApp and Instagram, in that order.
During the pandemic, people spent more time on the internet, and Facebook was one of the prime beneficiaries. In its most recent quarterly filing last month — its last under the Facebook name — the company said its revenue climbed 35% year over year to more than $29 billion while its net income grew 17% to nearly $9.2 billion.
It also announced a new financial reporting structure with two segments that will appear on its fourth-quarter report. One is “Family of Apps,” which includes Facebook, Instagram, Messenger and WhatsApp. The other is “Facebook Reality Labs,” which includes augmented and virtual reality hardware, software and content.
It’s that last bit that Meta is hoping will be its next-generation growth engine. In the third quarter, revenue in its “Other” segment that includes sales of its Oculus virtual reality headsets rose 195% from the prior year. But it only amounted to less than 3% of Facebook’s total revenue, which is dominated by advertising.
Pros of Buying Meta Stock
If you’re a long-term investor who believes the metaverse really is the next wave of social media, Meta is incredibly well positioned for that growth opportunity.
With nearly 3 billion monthly active users, Meta already is the biggest traditional social media company in the world. It also has a leading position in the virtual reality hardware market with its Oculus headsets and has said it plans to spend around $10 billion on augmented and virtual reality this year alone.
“Meta is spending more on their metaverse than most startups hope to generate in revenue, and they already have 37%-ish of the world’s population logging into their existing site every single month,” says Scott Turman, CEO of BrightRay Publishing. “Zuckerberg has a huge head start in every single way imaginable.”
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The community foundation the company has built through Facebook, Instagram and WhatsApp will serve it well amid the future adoption of its metaverse, says Michael Sikorsky, chairman of Copia Wealth Studios.
“The metaverse is an increasingly hot trending topic right now, and there are smart people who say that it is the future state of societal interactions,” he says. “Meta is making a major company shift, and by buying it you’re getting some exposure to this next technical trend.”
Will Reese, head of equity research at UMB Bank, notes that Meta’s metaverse won’t be built in a day. “While the metaverse will take time to form, it allows the company to move past their dependence on online ad revenue,” he says.
Cons of Buying Meta Stock
While there is growth potential in the metaverse over the longer term, Meta is having to contend with substantial headwinds right now.
“Overall, if it wasn’t for Apple’s iOS 14 changes, we would have seen positive quarter-over-quarter revenue growth,” Facebook chief operating officer Sheryl Sandberg said on a conference call accompanying the company’s quarterly results before the Meta announcement.
Instead, Facebook’s revenue came in $67 million under the prior quarter’s, and Sam Boughedda, equities trader at AskTraders, says the iOS issue “could continue to weigh on the company’s advertising revenue for some time.”
Apple’s operating system changes aren’t the only way the iPhone maker is threatening Meta. Its iMessage is becoming more popular, making it a more formidable competitor to Facebook Messenger and WhatsApp.
TikTok has also been nipping at Meta’s heels, with Zuckerberg on the conference call referring to the video-sharing app as “one of the most effective competitors that we have ever faced.”
Aside from competition, Facebook has also faced a series of scandals, with the latest involving accusations that it knew about mental-health risks posed by Instagram but put profits first.
“Good criticism helps us get better, but my view is that what we are seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company,” Zuckerberg said. “The reality is that we have an open culture where we encourage discussion and research about our work so we can make progress on many complex issues that are not specific to just us.”
As Meta spends aggressively on the metaverse in coming years, “this is during a time when their revenue growth and margins are already at risk due to iOS changes, whistleblower allegations and an aging user base,” Reese says. “FB’s apps are facing a slowdown in engagement from younger demographics, the company’s most lucrative ad market.”
And the metaverse itself, the gambit on which much of the future growth of the company is based, is far from a sure bet. Yes, it does seem as if virtual reality will become more of a part of everyday life, but what if it stays in the realm of entertainment and doesn’t catch on as widely as Meta is hoping?
Plus, there will be plenty of metaverse competitors, and Sikorsky says the ones with more hardware manufacturing experience, such as Apple, will have a leg up.
“Although Facebook needs something to prevent the shift from ‘maturity’ to ‘decline’ in its business life cycle graph, meta may just not be enough,” says Kunal Sawhney, CEO of Kalkine Group.
Bottom Line: Should You Buy Meta Stock?
At one point, owning Facebook shares was a no-brainer for investors seeking growth. It was earning tons of money. It also had a huge portion of coveted young users to whom advertisers wanted exposure.
To a large extent, those things are still true. But now the company is laden with risk to its social license to do business, and its user base is getting older. It’s facing more competition, and its plan for future growth lies in the belief that virtual reality will permeate our work, entertainment and social interactions.
For investors looking to bet on the metaverse concept, Meta is a premier stock to play that idea as long as you’re patient. For other investors, Meta could still be a good stock to buy — as long as you temper your expectations about growth.
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