Savvy investors make it a point to understand the major things that are driving the revenue and profits of the companies they invest in. For investors in Meta Platforms (META -0.29%), three of those major things are the fact that it has a massive user base that advertisers want to reach, the headwinds it's experiencing from Apple's privacy changes, and the fact that Meta is spending a lot of money on the metaverse.
If anything should change the direction of the aforementioned variables, it could have a meaningful impact on Meta's stock price.
1. Advertisers pay to reach its billions of users
As of June 30, Meta Platforms boasted 3.65 billion monthly active users across its family of social media apps, including Facebook, Instagram, WhatsApp, and Messenger. That was 140 million more than the same time the previous year. Despite its already massive scale, Meta is still growing its user totals, though with so much of the world's population already members, investors can reasonably expect user growth to slow.
Meta makes money by showing advertisements to users as they browse. Advertisers are willing to pay handsome sums to influence the purchasing decisions of those who use Meta's apps. In 2021, the company generated $118 billion in revenue, up from $28 billion in 2016. That said, Meta's revenue growth has reversed due to several factors including the broader economic downturn impacting advertisers' budgets and changes to Apple's privacy policy that are making Facebook ads less enticing.
2. Apple strikes a blow to Meta Platforms
Apple's changes to its operating system in the second half of 2021, which make it more difficult for Meta to track user data, are decreasing advertiser appetites. Prior to these changes, Meta had a greater ability to sell targeted advertising, bringing marketers a higher-investment return. Without the data, advertisers will incur more wasted spending, such as showing an ad for a local restaurant in Buffalo, New York, to an individual in Miami, Florida.
Partly due to these changes, Meta Platforms' revenue decreased by 1% in the quarter ending June 30. That's a far cry from the 41.3% compounded annual revenue growth rate the company experienced over the previous decade. Meta might find a workaround to the issues arising from the changes, but it will take time. One option could be for Meta to integrate ways for users to share more information about themselves voluntarily.
3. The metaverse holds promise
Perhaps anticipating worsening prospects for its social media business, Meta Platforms initiated a pivot toward becoming a metaverse company. According to a report from McKinsey & Company, the metaverse could have a value of up to $5 trillion by 2030, so it's no wonder that Meta CEO Mark Zuckerberg wants to enter the arena. Meta has already allocated $10 billion to start the transition. That said, the company warned shareholders that this is a long-term vision, and they should not expect the investments to materialize into revenue or profits for years.
In addition to advertising, Meta aims to generate revenue from the metaverse in at least one additional way: sales of hardware like virtual reality headsets.
Zuckerberg talked up the metaverse potential -- and possibly took a swipe at Apple -- in the company's conference call with analysts on July 27:
... the metaverse is a massive opportunity for a number of reasons. Most importantly, it enables deeper social experiences, where you feel a realistic sense of presence with other people, no matter where they are. ... By helping to develop these platforms, we're going to have the freedom to build these experiences the way that we and the overall industry believe will be best rather than being limited by the constraints that competitors place on us and on our community and on small businesses. ... This is obviously a very expensive undertaking over the next several years. But as the metaverse becomes more important in every part of how we live ... I'm confident that we're going to be glad that we played an important role in building this.
Investors interested in Meta Platforms should keep an eye on these trends.
