Meta Platforms (META -2.70%) has had a challenging time lately. In 2021, the tech company's stock reached an all-time high of $382. Since then, the share price has fallen precipitously, hitting a low of just $88. The company's challenging performance and murky outlook turned most investors away.

Lately, the share price has almost doubled from its low. Is that a signal that the worst is over for Meta, and now is a good time to buy the stock? Let's explore this further.

Two smiling people look at their smartphones.

Image source: Getty Images.

Meta's core advertising business faces enormous headwinds

Once a crown jewel, Meta's advertising business is struggling to keep up with its prior success.

Except for the first quarter, Meta's advertising revenue in each of the quarters of 2022 was weaker than the prior-year period. In the fourth quarter, advertising revenue came in 4% lower at $31.3 billion, bringing full-year advertising revenue down by 1% year over year.

The weak advertising performance put enormous pressure on Meta's profitability, causing its net income for 2022 to fall by 41% to $23.2 billion. The tech company blamed its poor performance on the weak economy, competition, and negative impact from the change in Apple iOS user tracking policy.

The silver lining was that the company's family of apps (Facebook, Messenger, WhatsApp, and Instagram) grew engagement levels in all four quarters of 2022. Total daily active users (DAU) across all apps reached 2.96 billion, and Facebook DAU 2 billion. The solid engagement levels suggested that Meta had yet to lose its relevance, especially after early signs that its short video service Reels was gaining momentum among users.

Besides, the tech company is hyperfocused on improving efficiency in 2023, even after it slashed its headcount by 11,000 and restructured or terminated various building leases in 2022. It hopes its cost-reduction effort can boost its bottom line, especially when top-line growth seems almost impossible.

The road to the metaverse remains highly murky

Meta has high hopes for its metaverse bet. The company spent $10.2 billion in 2021 and another $13.7 billion in 2022 to gain a foothold in this emerging industry.

But there are two significant issues here. First, the metaverse business -- categorized as Reality Labs -- reported a slight decline in revenue in 2022, even as losses expanded. Despite its heavy investments, the poor top-line performance might indicate that Meta's devices had difficulty expanding beyond early adopters.

On top of that, investors might question whether it's wise for the company to spend so much when the advertising business is facing issues sustaining growth and profitability. For perspective, Reality Labs consumed around one-third of the advertising business's 2022 profit.

On the one hand, it might seem perfectly rational for Meta to invest heavily in this emerging industry, given its potential. For example, J.P. Morgan estimates the industry will be worth $1 trillion in revenue in the coming years. Still, while many big names have been bullish on the metaverse, this is just one prediction. The sector must reach mass adoption to deliver such numbers, but so far, it's just early adopters who are interested.

Besides, even if the metaverse could reach the mainstream, it might take significantly longer than expected. In that case, Meta's return on investment (ROI) in these ventures could be much lower than expected, especially if it's too early in the game.

In short, there are too many uncertainties for investors to be comfortable with the metaverse yet.

So is Meta's stock a buy?

Meta's cash-cow business is under pressure to prove that it can survive (and thrive) amid challenges like competition from Tiktok, the change in iOS's data policy, and the weakening global economy.

It doesn't help that Meta's newer venture still burns a lot of cash while generating subpar performance in 2022. Conservative investors have little incentive to buy shares in Meta.

Still, contrarian investors may take a chance on the company -- if they think that Meta's advertising business will recover and grow further over the long term, and that the metaverse business will generate significant future income.

After all, the advertising business is still making a lot of money, with $29 billion in operating profit in 2022. And the stock valuation is not that excessive -- Meta's price-to-earnings (P/E) ratio is 20, which is lower than its five-year average of 25.

For most investors, it would be best to stay on the sidelines for now. But if you have the tolerance to withstand volatility, you might consider taking a small position in Meta's stock.