Stock splits have grabbed headlines in the financial world this year. Although stock splits don't fundamentally change a company's value, the need for them could hint at significant gains in the company's recent history. Amazon (AMZN 1.49%), Tesla, Shopify, and Google parent Alphabet have all elected to use stock splits to reduce their high share prices to make them more attractive to smaller investors.
Global e-commerce leader Amazon, for example, currently trades at around $2,100 per share. But after its 20-for-1 stock split takes effect on June 3, that price will shrink to around $105. While it might result in more investors buying the stock, it's important to note that this won't add any intrinsic value to the underlying business.
For that reason, it's more important to focus on the fundamental picture of a given company. While the aforementioned stock-splitters are great businesses, social media giant Meta Platforms (META 0.14%), which isn't splitting its stock could have more upside potential than all of them from here. Here's why.
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A stellar track record
Before diving into Meta's exciting future with new development projects like the metaverse, it's important to look at the business as it exists now, and how it arrived here. Meta is the parent company of the largest social media and messaging platforms in the world including Facebook, Instagram, Messenger, and WhatsApp. Together, they host over 3.64 billion users every month, which is almost half the population of the entire world.
The company debuted on the public markets in May 2012 at a price of $38 per share, and at one point in 2021, it soared as high as $384, rewarding those initial investors with a 910% return if they sold at the peak. Now, it's back down to around $196 -- but that still gives it a compound annual growth rate of almost 18%. Meta was profitable in the years prior to its IPO, which is uncommon among modern-day tech companies, and when analyzing its financial performance, it's not hard to see why the stock had done so well.
But as noted above, since logging that all-time high stock price last year, Meta has since lost almost 50% of its value. It's dealing with external difficulties from the likes of Apple, which recently improved its privacy policies in ways that made it harder for social media platforms to track users' online activity, which in turn reduced the amount of information they could tap to deliver targeted advertising to people. In addition, with such an enormous user base, the company is starting to hit a growth ceiling.
But one internal issue investors are concerned about is the magnitude of Meta's expenditures on its new Reality Labs segment, which is geared toward developing the metaverse. The segment burned $10 billion in 2021 and a further $2.9 billion in the first quarter of 2022. But will it pay off?
Enter the metaverse
The metaverse is pictured as a collection of persistent digital worlds in which people will be able to interact with each other and their environs, accessible through virtual reality or augmented reality headsets. If this parallel virtual world can be turned from a hypothetical vision into a high-tech reality, it could change the way we work and interact socially. Meta Platforms CEO Mark Zuckerberg anticipates users will "exist" in the metaverse as avatars of themselves, with inventories of digital goods and the ability to shift easily between different experiences.
If Meta can build a primarily digital world that attracts as many users as its social media brands, it could make enormous amounts of revenue just by taking a small percentage of each transaction that occurs within that world. The model might be similar to the way Apple takes a piece of all App Store revenue generated by app creators.
In the here and now, Meta has been showcasing its new Cambria mixed-reality headset, which fuses the virtual world with the real one. The wearer can observe their physical surroundings with digital enhancements projected into their vision. The headset could eventually replace personal computers and workstations for office-based employees.
By some estimates, the financial opportunity in the metaverse might be anywhere between $1.6 trillion and $30 trillion by 2030 -- so really, Meta's investment in Reality Labs so far is a drop in the bucket by comparison.
Significant upside might be ahead
Setting aside the metaverse opportunity, Meta Platforms stock is incredibly cheap right now. The company has delivered earnings per share of $13.22 over the past 12 months, which gives its stock a price-to-earnings multiple of just 14.6.
That's a 42% discount to the Nasdaq-100 technology index which trades at a multiple of 25. And that index is currently in a bear market after plunging 29% from the all-time high it hit in November.
In other words, Meta Platforms' stock price would need to rise 72% just to trade in line with the broader tech sector. It's important to note that the Facebook parent operates in a different segment of tech with varying growth measures from its stock-splitting peers. However, to the value investor, stock-split stocks Amazon and Tesla which trade at multiples of 52 and 90, respectively -- are lightyears more expensive than Meta.
Therefore, even when discounting the multitrillion-dollar opportunity in the metaverse over the next decade, Meta might still have more upside than some of the stock splitters on a value basis alone.
