Meta Platforms' (META -0.37%) share prices are down by 35.3% so far in 2022, which means that savvy investors looking to take advantage of the growing spending on digital advertising and hot tech trends such as the metaverse may find this a tempting opportunity to buy the stock.
But at the same time, Meta Platforms faces near-term uncertainty that may cause its stock price to slip further. Let's take a closer look at two reasons why it makes sense to buy Meta stock right now, and then weigh them against one potential red flag.
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Reason 1 to buy: The advertising business is built for long-term growth
Advertising is Meta Platforms' biggest moneymaker, producing $115 billion in revenue in 2021 and accounting for 97% of its top line. Advertising revenue increased 36% in 2021 and could keep growing at a nice pace for years, thanks to the company's solid position in this massive market.
Digital ad spending hit $492 billion last year, according to eMarketer's estimates. Based on Meta's 2021 ad revenue, it gobbled up just over 23% of the global digital ad spending pie -- up from 22% in 2020. In further good news for the company, digital ad spending is expected to rise by 60% to $785 billion by 2025.
If Meta manages to increase its share of that market to 25% by 2025, its advertising revenue could jump to nearly $196 billion. That would be an impressive increase over last year's ad revenue, and it wouldn't be surprising to see Meta hit that mark given the company's huge user base.
Meta's family of apps, which includes Facebook, Instagram, Messenger, and WhatsApp, boasted 3.59 billion monthly active users as of the end of 2021. The number of daily active users was 2.82 billion. So, Meta still looks like an ideal platform for marketers and advertisers to use to reach the viewers they seek, considering its huge user base. That should help drive secular growth for the company in the long run.
Reason 2 to buy: The metaverse could unlock a big opportunity
The metaverse is billed as a soon-to-exist three-dimensional, persistent digital world (or worlds). Eventually, say its proponents, it will be accessible in real-time by an essentially unlimited number of people spread across the globe, who will interact with it and each other via virtual avatars. This nascent tech trend has started gaining traction, and many brands are now charting out their presence in the metaverse.
Additionally, virtual music concerts, sports events, and conferences are expected to find homes in the metaverse. If it lives up to the hype, it could become the next big evolution of the internet, providing people with a new way to socialize, work, learn, play, and collaborate in an immersive manner. Goldman Sachs analysts estimate that the metaverse could open an $8 trillion revenue opportunity for participants over the long run.
This explains why Meta Platforms is betting big on the metaverse. The company put $10 billion into developing metaverse technology in 2021 -- and management says that annual outlay could keep climbing in the coming years. Now, the company is taking its first steps to monetize it. Meta Platforms is testing a way to allow developers and creators to sell virtual items and experiences in Horizon Worlds, a virtual-reality-enabled social platform.
Meta will take a cut out of the sales of those in-platform items. More importantly, it's also encouraging developers to attract users to Horizon Worlds by offering them bonuses for building out new virtual spaces. In this way, Meta has started pulling the strings to make money from the metaverse, and the company hasn't ruled out running advertisements on its virtual platform.
In short, Meta Platforms is making a concerted effort to diversify its revenue stream by tapping a potentially lucrative trend.
A reason to sell: Near-term weakness may be in the cards
While the long-term picture for Meta Platforms appears to be bright, the near-term prospects are a tad disappointing. Following last year's terrific revenue growth of 37% to $118 billion and a 36% increase in earnings to $13.77 per share, its top line is expected to increase at a relatively slower pace of 12% in 2022.
Meta's slower revenue growth this year can be attributed to tougher year-over-year comparisons as the company saw stronger-than-expected demand in 2020 on account of strength in online commerce. The company also points out that cost inflation and disruptions to the supply chain are impacting advertising budgets.
Additionally, Apple improved its privacy protections for iOS users recently, which makes it harder for digital advertisers and the makers of applications to track users' online behaviors. This will be another headwind for Meta Platforms. The social media giant is expected to lose nearly $13 billion in revenue this year due to Apple's user-privacy-related upgrades.
Also, Meta's earnings are expected to drop to $12.30 per share this year on account of a ramp-up in expenses. Meta has guided for total expenses of $90 billion to $95 billion in 2022, which would be a big increase over last year's outlays of $71 billion. The increase will be driven by investments in infrastructure such as data centers and servers, as well as "a significant increase in our AI and machine learning investments."
However, the company's growth is expected to pick up speed again in 2023.
FB EPS Estimates for Current Fiscal Year data by YCharts
If catalysts such as the metaverse come to fruition and Meta successfully mitigates the headwinds generated by user-privacy improvements, the company could eventually regain its mojo -- especially given the secular growth of digital ad spending. That's why investors should consider looking past the near-term headwinds and keep accumulating Meta Platforms stock while it's trading at just 15 times trailing earnings -- a big discount to its five-year average earnings multiple of 29.
