Technology conglomerate Meta Platforms (META -10.56%) continues investing heavily in the metaverse. This hasn't gone over well with Wall Street, which can sometimes act like a popularity contest. The stock has fallen roughly 68% since Mark Zuckerberg announced the rebranding of his company to Meta Platforms.
But doing the right thing isn't always popular, and Meta has forged on with its plans to invest tens of billions of dollars to develop its metaverse business Reality Labs, an investment that Zuckerberg has acknowledged could take years to bear fruit.
Long-term investors must understand why Reality Labs has become so important, so here is what it could mean for your investment thesis and why Zuckerberg will probably keep spending that money.
It's about that fruit logo in Cupertino
Reality Labs, Meta's metaverse segment, gets most of the headlines, but the company's social media apps like Facebook, Instagram, and WhatsApp built Meta into the juggernaut it is today. Collectively, these apps have 2.93 billion daily active users, and 3.71 billion if you go by monthly active users. In other words, nearly half of the world's population uses one of Meta's apps at least once per month.
Meta advertises to this massive audience, which is how the company generated the vast majority of its $118 billion trailing 12-month revenue. But Meta's dominant platforms have a severe weakness: Apps live on devices, potentially putting device manufacturers like Apple between Meta and its users. It's like social media apps represent individual stores within a shopping mall, but Apple owns the mall itself, so it can make the rules for the stores and people that visit it.
If you're Meta, you can't refuse Apple's rules. Apple has roughly 1.8 billion active devices worldwide, a massive chunk of your user base. Apple began giving users the ability to deny apps like Meta's access to user data, which makes it much harder to track and target them with the appropriate ads. Meta estimated in February that the changes on Apple devices would cost it an estimated $10 billion in lost revenue in 2022.
Race to the future
So instead of letting Apple walk all over Meta, it seems that Mark Zuckerberg has decided that Meta will build its ecosystem (the shopping mall in the above example) so that it can operate freely and without the problems that a company like Apple is causing.
There are similarities if you consider the playbook Apple used. Apple developed a device that consumers loved (the iPhone) and grew to dominate that market. The hardware is ultimately a mousetrap to get you into Apple's iOS ecosystem, where you subscribe to services, buy apps, and generally play within Apple's rules.
People and technology evolve, though, and Meta hopes the smartphone will someday become antiquated. Zuckerberg seems to believe that augmented and virtual reality is the future, and that's why Meta's pushed so hard into the space, from its Ray-Ban story glasses to the Oculus Quest headsets.
Meta's in the phase where it creates a device that it hopes will capture an enormous market share. And just like the App store, the software ecosystem Meta builds around its hardware will be the crown jewel of the business model.
It's a tremendous bet by Meta, arguably the largest in corporate history. The company has maintained that it will spend tens of billions of dollars to see this through. It could be because Meta knows the long-term stakes, and it doesn't want to let Apple have the next big thing and end up in the same position again.
Will it work?
That's the billion-dollar question. If you're asking whether Meta can capture the AR/VR market, then it seems that's a yes. Meta has an estimated 90% market share of the world's VR headsets.
Of course, it's unknown whether the adoption of AR/VR headsets will reach the size needed to give Meta an iOS-size business, and it's still early enough that competition could emerge. Apple hasn't confirmed a headset product of its own, but CEO Tim Cook has hinted to its development.
Wall Street can quickly look at Meta's spending as a potential recession looms and hit the panic button. But Zuckerberg believes that life after smartphones is so vital to Meta's future that it must continue on. Zuckerberg has successfully created one of the world's most influential companies with bold decisions, but only time will tell whether Reality Labs will pan out too.
