Meta Platforms (FB +1.81%), formerly known as Facebook, has garnered lots of attention recently, primarily due to the causes that led to the name change. The company has highlighted that it will be investing aggressively to become a leader in the metaverse. The move has investors split into two camps.
On the one hand, the move to the metaverse expands its total addressable market, which could keep revenue growing for more than a decade. On the other hand, some investors are worried about the resources in time and capital that Meta Platforms could allocate to the project with uncertain outcomes. Nevertheless, the company's core social media business is experiencing robust user and revenue growth at a massive scale. Let's try to grasp Meta Platforms' business better and determine whether it's a buy, sell, or hold for 2022.
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Meta Platforms could spend more than $10 billion per year on the metaverse
Meta Platforms' business is fueled by its family of social media apps, including Facebook, Instagram, and WhatsApp. The three combine to total 2.8 million daily active users. More than a quarter of the world's population checks in on one of Meta's apps daily. That's impressive and desirable if you're a marketer.
Meta's apps are free to join and use; the company makes money by showing its users advertisements. Of course, marketers are willing to pay more if their ads can be delivered to more people. What makes Meta's user base even more attractive to advertisers is that people willingly reveal information about themselves, such as age, marital status, favorite movie, etc. This is all information marketers can use to target their advertisements more efficiently.
Increasing efficiency improves the return on investment markets get on ad spending. For instance, if a person reveals their favorite movie features Marvel's Avengers, that is likely an ideal candidate to send ads for Marvel's Eternals out in movie theaters right now. And as long as marketers keep seeing healthy returns on their investments in advertising on Meta's family of apps, they will keep up the spending.
Indeed, they have. Nearly all of the revenue Meta generates comes from ad revenue, and in the last decade, it compounded annual revenue at a rate of 45.8%. Meta's social media business is doing quite well, though the revenue growth rate has decelerated in four consecutive years. That could be one reason that prompted the company to announce an aggressive investment into building its metaverse.
To help quantify the investments Meta will be making in the buildout of the metaverse, it is creating a new reporting segment Facebook Reality Labs (FRL). CFO Dave Wehner stated that the segment would hit the company's operating income to the tune of $10 billion in fiscal 2021 and more in the years to follow. The expense is sure to be high, but the reward may be worthwhile, as CEO Mark Zuckerberg aims to have 1 billion users in the metaverse in roughly a decade.
Should you buy Meta Platforms' stock?
Meta Platforms has an excellent business, and with its investment in the metaverse, the potential for revenue growth long into the next decade. The stock is not expensive, either. On the contrary, trading at a price-to-free cash flow of 26.5, it's near the lower end of its range of the last five years. Ditto if you look at the price-to-earnings ratio of 23.5. Excellent prospects right now, massive potential in the long run, and an inexpensive price point to Meta Platforms stock being a buy for 2022.
