The metaverse may sound like something out of the latest “Doctor Strange” movie. But according to Meta Platforms Inc. (ticker: META) CEO Mark Zuckerberg, it’s not only the future of how humans and businesses will interact digitally, but also of the company he created as a website called “The Facebook” in his Harvard dorm room in 2004.
As Facebook grew and bought competitors to become a social media conglomerate that is now one of the biggest companies in the world, it made sense that it would change its name, similar to the way Google did to become Alphabet Inc. (GOOGL, GOOG).
The name Meta Platforms says quite a bit about where Zuckerberg wants to take the company. But it also encapsulates the unknowns facing the company over the long term. Here are some factors investors need to understand as they consider whether or not to buy Meta stock:
— Meta stock at a glance.
— What’s the deal with the metaverse?
— Cons of buying Meta stock.
— Pros of buying Meta stock.
— Bottom line: Should you buy Meta stock?
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Meta Stock at a Glance
By 2007, Facebook was valued at $15 billion; 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. Its market capitalization now, even after losing about half of its value this year, is more than four times that.
The company had more than 1 billion monthly active users by December 2012. More important, Facebook acquired Instagram for $1 billion in August 2012. Instagram’s focus on photographs and mobile users not only proved prescient but also paired well with Facebook’s growing mobile base.
Finding up-and-coming companies with services that complemented its own was an effective strategy for Facebook over the years. Following its purchase of Instagram, it 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. Even in Meta’s less-than-stellar second quarter of 2022, daily active users across its family of apps were up 4% from the previous year.
During the pandemic, people spent more time on the internet, and Facebook was one of the prime beneficiaries. That trend and the economic recovery from the pandemic helped boost Meta’s quarterly revenue to a record high of more than $33.6 billion in the last quarter of 2021. Its total annual revenue that year was nearly $118 billion, a rise of nearly 40% over 2020.
But as for many companies, fortunes have changed this year as the economic recovery ushered in the highest inflation in years and the Federal Reserve‘s campaign to rein it in has raised the specter of a recession, which we may already be in, depending on who you ask.
What’s the Deal With the Metaverse?
It’s too early to list Zuckerberg’s bet on the metaverse, the envisioned immersive computer-generated three-dimensional world that will rely on virtual and augmented reality, as a pro or a con. At worst it’s a risk that won’t pan out; at best it’s an unknown that leads to a new era of growth for one of the world’s most successful companies.
On the one hand, Zuck, one of the most brilliant minds in technology, could well prove naysayers wrong. On the other hand, the metaverse may not pan out to be as big of a deal as he’s thinking. Perhaps somewhere in between is a metaverse populated by many competitors where Meta’s virtual reality hardware doesn’t play a dominant role.
“We don’t pretend to know how the metaverse ecosystem will look in five years,” says Kenneth Landau, CEO of Mytaverse, a cloud-based metaverse platform that creates 3D work environments. People may enter the metaverse not only from virtual reality headsets like those made by Meta, but also from mobile devices and desktops, says Landau. That means competition for sales of headsets.
“In 10 years, we believe most of Meta’s 3 billion users will likely connect through 3D platforms known as the metaverse; it’s just unlikely most of them will enter the metaverse via Meta’s headsets,” he says.
For now, Meta is in investment mode when it comes to building its metaverse offerings, and that means spending money. That’s not necessarily a bad thing, in a similar way to how many startup companies, no matter how hot, take a while to turn a profit. And in the case of Meta, its Reality Labs “startup” is a segment snugly housed in a $450 billion advertising behemoth, where it won’t lack for funding.
Still, the Reality Labs segment, which contains augmented and virtual reality hardware, software and content, is a drain on Meta’s profitability. In Meta’s most recent quarter, the unit lost $2.8 billion, bringing total income from operations down from $12.4 billion to $8.4 billion year over year.
“For a company that seems to have gone all-in on the metaverse, its virtual reality venture so far is undoubtedly worrying,” says Sam Boughedda, a trader and stock market writer with trading information platform AskTraders.com.
Cons of Buying Meta Stock
Zooming back in to the immediate term, the No. 1 headwind facing Meta is declining advertising revenue. During the second quarter, the price Meta could fetch per ad declined 14% year over year, contributing to a 1% decline in overall revenue, the company’s first sales dip since it went public in 2012.
In response to waning e-commerce demand, the war in Ukraine and rising inflation, businesses have been forced to decrease their advertising budgets, says Wes Gottesman, market advisor at trading platform TradeZing.
“Now that the Fed has instituted a second historic rate hike, and as the policy’s effects become pervasive throughout the economy, expect demand for Meta’s ads to continue to drop,” says Richard Gardner, CEO of Modulus Global, which provides financial software to brokerages and professional traders.
“We’re either in or about to enter a recession, and during recessions, most firms cut down on advertising,” Landau says.
In addition to the economic headwinds, Apple Inc.’s (AAPL) iOS rule changes on collecting user data have also dented Meta’s ability to sell ads, he says. A Meta executive earlier this year said the company expects Apple’s policy to cost it more than $10 billion in sales this year.
“Add increased competition from TikTok and Snap, and Meta is facing the most headwinds in its history,” says Landau, who also notes that the announced departure of Chief Operating Officer Sheryl Sandberg is a headwind.
And that’s not all. Meta also faces regulatory risk, such as from a Federal Trade Commission antitrust lawsuit that 46 U.S. states have joined.
“Of increasing concern is the broad and bipartisan shift in tone from U.S. regulators and lawmakers regarding big tech/media,” ratings agency Moody’s Investors Service said earlier this month in a note rating Meta’s inaugural bond issuance. “Investigations launched by the Justice Department and the House Judiciary Committee are looking into big media/tech more broadly.”
Pros of Buying Meta Stock
But just because there are some choppy waters doesn’t mean the boat is anywhere near sinking.
“While there are headwinds, Meta is still an enormous company, and analysts predict its advertising revenue growth will eventually stabilize and weather the storm, which would be a significant plus for investors,” Boughedda says.
Plus, the stock has an attractive valuation after falling around 50% so far this year, “although I would still be looking for positive catalysts,” Boughedda says.
Gottesman says the company is “an excellent long-term stock choice” with a price target of $215 per share. As of Aug. 9, “the stock is trading in the $168 range, so now would be the time to buy and plan to hold,” he says.
Gottesman says ad revenue from the company’s Reels short-form video platform will grow over time, and its click-to-message advertising method is also promising. Those types of ads send people who click on a certain area directly into a conversation with a business in Messenger, Instagram or WhatsApp.
“Meta’s user numbers in general will grow as the world transitions to digital,” Gottesman says. “The world is changing as it moves toward a digital means of interaction and business. Meta is at the forefront of this change.”
Bottom Line: Should You Buy Meta Stock?
Weighing the pros and cons and looking at the potential for the metaverse, it seems as if long-term investors who don’t have any shares of Meta stock may want to pick some up while they’re so much cheaper than they were last year.
“Meta is a stock that belongs in an investor’s portfolio, assuming it meets their risk tolerance,” Gottesman says.
Even if you strip out the metaverse concept, the company still brings in lots of money from advertising, which will eventually bounce back along with the economy. And for those who believe in the future of the metaverse, Meta is a premier stock to play that idea as long as you’re patient.
“While there are obvious issues, Meta’s current valuation, the potential stabilizing of its advertising growth beyond Q3 and its shift to short-form video content do provide some potential bullish catalysts,” Boughedda says. “Personally, I am sitting on the sidelines, but I do see the bull case for the stock.”
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Should You Buy Meta Stock? originally appeared on usnews.com
Update 08/10/22: This story was published at an earlier date and has been updated with new information.
