Meta Platforms (META 0.43%), formerly known as Facebook, changed its name in 2021 to indicate its focus on all things metaverse. However, that transition has, quite frankly, been a disaster, with the stock down nearly 42% since the change.
Even though the metaverse segment gets the bulk of the attention, it doesn't make up much of Meta's revenue. So let's dive into Meta's business and see whether there's a portion worth investing in.
Reality Labs accounts for a large chunk of expenses
Advertising from Meta's social media platforms (like Facebook and Instagram) contributes most of the company's revenue.
Image source: The Motley Fool.
With Reality Labs (the metaverse division) making up just a tick more than 2% of total revenue, it hardly moves the needle. But that doesn't paint the whole picture. When you look at the operating expenses, Reality Labs plays a much bigger role.
| Segment | 2022 Operating Expenses | Percent of Expenses | Operating Margin |
|---|---|---|---|
| Family of Apps | $71.8 billion | 82% | 37% |
| Reality Labs | $15.9 billion | 18% | (635%) |
Data source: Meta Platforms.
When a segment contributes only 2% of revenue but 18% of operating expenses, that's a problem. Clearly, this portion of Meta has been a massive drag on the company and is a significant reason its operating profits have plummeted.
META Operating Income (TTM) data by YCharts.
This is why CEO Mark Zuckerberg is often criticized for focusing too much on the metaverse: It isn't moving the needle and is dragging down a pretty solid business.
If you zero in on Meta's Family of Apps business instead, it's not perfect, but it is still impressive.
Meta's stock has rallied this year thanks to optimistic comments from Zuckerberg
Meta's Family of Apps revenue only fell 4%, year over year, in Q4. This is impressive considering the challenging advertising environment. However, this segment also dealt with rising expenses, as the operating margin fell from 49% last Q4 to 34% this year.
That's quite the drop, but a 34% operating margin is still higher than many companies could dream of.
Although Zuckerberg isn't backing away from the metaverse, he is focusing on cost-cutting measures. He has dubbed 2023 the "year of efficiency," which will include axing some programs. We will have to wait to see these measures, and all eyes will be on Meta's Q1 report to see whether Zuckerberg was blowing smoke or was actually committed to trimming expenses.
Judging by the stock action, the market believes Zuckerberg. Since the earnings report, the stock is up 21%, bringing its year-to-date gains to 54%.
So even with the metaverse sideshow, does Meta Platforms present a business worth investing in? I think so.
Meta's social media platforms still provide advertisers with some of the best bang for their buck and will likely continue doing so for some time. Additionally, the stock currently trades for 20 times earnings, well below its long-term average.
META PE Ratio data by YCharts.
Meta's earnings are likely at the lowest point they'll ever reach, especially with Zuckerberg focusing on efficiency. With the stock inexpensively valued, it's intriguing at these prices.
However, I will likely distance myself from the stock because of the metaverse wildcard. If the investment doesn't work, Meta will have burned billions of dollars chasing something that never materialized. Additionally, if Zuckerberg is too fixated on it, it could become a "me against the world" situation and continue harming the stock.
With Zuckerberg holding more than 50% of the company's voting power, there is also no one to stop him from pursuing pet projects.
Meta Platforms is still a great business and could be investable, but given its unnecessary emphasis on the metaverse, I'll pass for now.
