Wall Street must think that Meta Platforms (META -13.40%) founder and CEO Mark Zuckerberg has lost his mind spending tens of billions of dollars on developing Reality Labs, the company's business segment building for the metaverse. The FAANG stock, which is supposed to be among the most dominant technology stocks on earth, has fallen in value a whopping 57% from its high, its most significant drawdown since going public.
But is Zuckerberg making a huge mistake here, or is he crazy like a fox? Fortunately, it doesn't actually matter for the company's overall performance.
Let's take a look at why the stock is a table-pounding buy with or without Reality Labs.
Social media apps can't stop, won't stop
Meta continues to dominate the social media landscape. According to Sprout Social, three of the world's top four most downloaded smartphone apps in the fourth quarter of 2021 were Instagram, Facebook, and WhatsApp, all owned by Meta Platforms.
Meta's family of apps has amassed a staggering 3.65 billion monthly active users as of the second quarter of 2022. Consider that the global population is approaching 8 billion, and an estimated 2.9 billion have never used the internet. That means that most technologically adept people use Meta's social media networks.
Incredibly, Meta's reach continues to grow; the company's monthly active users grew 3.9% year over year in Q2. Meta currently gets most of its revenue from advertising to its user base. Still, there is future growth potential in payments, e-commerce, and other avenues that Meta can aggressively roll out because it has a built-in customer base; it's arguably a distribution network unlike any other in the world.
Meta stock is cheaper than it looks
Meta has struggled with Apple's iOS privacy changes that can block iPhone apps from tracking user data. However, share price declines have dramatically outrun the actual impact on Meta's financial performance.
Ultimately, shareholders want as much of a company's cash profits as possible for their investment. Therefore, you can look at a stock's free cash flow yield to see how much you're getting; more is better. In Meta's case, the stock had never offered investors more than a 5% yield on free cash flow until this year; now, the yield is at 8%, its highest ever by a country mile:
META Free Cash Flow Yield data by YCharts.
Remember these two critical factors. First, this is free cash flow -- Meta's cash profits, despite its weakened advertising business. Second, Meta has spent aggressively on Reality Labs, jacking up its capital expenditures in recent quarters. These expenses take away from free cash flow, which means the free cash flow yield would be even higher if it weren't for Reality Labs.
Meta is masking its business's profitability by spending so much on Reality Labs. The company makes about $0.33 in free cash flow from every revenue dollar, which jumps to almost $0.49 if you go by cash from business operations. It's hard to find a business that big, spitting out cash profits so efficiently.
What if Zuckerberg is right about the metaverse?
It can be tempting to think short-term sometimes; Wall Street sees Meta spending all this money and receiving little in return. However, few people have stopped to wonder about the potential upside if Zuckerberg is right about his metaverse ambitions. Meta has outlined that Reality Labs is a multiyear investment that could take as much as a decade to bear fruit.
Meta could emerge with a technology juggernaut that it spent years and many billions to build, which competitors won't easily replicate. Zuckerberg has discussed the idea that the metaverse could house a digital economy with up to a billion people interacting, trading, and spending within it. You can be sure that Meta would be incorporating advertising into it, too, a digital world that theoretically has no physical limitations.
Sure, it's a bold ambition that would understandably give investors pause, and it's the type of massive bet that few companies can afford. However, Meta can afford it, and investors are getting the stock so cheaply valued that it could be a complete zero, and the stock is still cheaper than it's ever been, just on its existing social media networks. It could take years to see this play out, but it's hard to deny today's attractive risk-reward proposition.
