3/9/2023 0 Comments Meta stock![]() ![]() Today Meta is announcing some new developments that speak to this pivot: a raft of enterprise services aimed at a new effort to get businesses using its new, high-spec $1,499 Meta Quest Pro VR headsets in the workplace. But under the worst-case scenario, which is probably far more likely, its metaverse efforts will cost tens of billions of dollars and yield nothing meaningful.Earlier this year, when we covered the news that Meta had signed on with fast food giant McDonald’s as a customer for Workplace, the B2B service that was originally conceived as a Facebook for enterprises, we noted that Workplace the product had, curiously, been moved into a larger “Reality Labs” division to bring it closer to Meta’s VR business. Under the best-case scenario, Meta could have a trillion-dollar business on its hands. McKinsey thinks the metaverse could generate $5 trillion in spending by 2030. The metaverse business carries even more uncertainty. The advertising business could remain a cash machine for decades, or it could shrivel away as other social media platforms rise in popularity. ![]() This strategy will work until it doesn't. Hurling more ads at its users will only give them more reasons to abandon the company's platforms. The company boosted the number of ad impressions by 15%, but the average price per ad tumbled 14%. Meta's revenue slumped 1% in the second quarter, and net income plunged 36%. That leaves Meta with social media apps that are likely past their prime, with the added weight of suffering the consequences of the changes Apple made to privacy in iOS that reduces the effectiveness of ads on Meta's platforms. Instagram is more popular, but it's been surpassed by TikTok and is at risk of suffering the same fate as Facebook.Īcquisitions are probably off the table there's no way regulators would allow Meta to snap up another social media app. Less than one-third of U.S teenagers use Facebook, according to a Pew Research Center study. The advertising business is far from stable, as we've learned this year, and it's dependent on the continued popularity of social media apps that are losing their luster with younger users. I view Meta as two wild cards smashed together. This is the wrong way to look at the company, in my opinion. Even if the metaverse turns out to be nothing, you've still got that advertising business. The bull case for Meta involves viewing the company as a stable, growing, highly profitable advertising business plus a wild card that could one day dwarf that advertising business. ![]() Meta is made up of two parts: the core advertising business, which monetizes the billions of users of its family of apps, and the metaverse business, which is the company's moonshot. For a dominant company growing that quickly, a P/E ratio of 25 probably seemed pessimistic. Revenue soared 37% in 2021 to $118 billion, and both net income and free cash flow were right around $39 billion. If you looked at Meta stock last year, you might have been fooled into thinking it was incredibly cheap despite a trillion-dollar valuation. Investing in the company is a pure leap of faith. The range of potential outcomes is so vast that valuation metrics are completely meaningless. Meta Platforms ( META 1.97%), the company behind Facebook, Instagram, and the money pit it calls the metaverse, does not fall into this category. How much free cash flow will Procter & Gamble produce 10 years from now? Using the current value and the historical growth rate, you can come up with a reasonable estimate that will probably be in the ballpark. Standard valuation metrics like the price-to-earnings (P/E) ratio and the price-to-free-cash-flow (P/FCF) ratio are useful when the future of a company is at least somewhat predictable.
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