Meta Platforms (META -0.27%) is a controversial stock these days. On one hand, the bulls like it because of its dominance in digital advertising. The bears, however, complain about the company's risky bets on unproven ventures like the metaverse.
As investors, we benefit from having a balanced view of a stock before investing. So let's explore both the bullish and bearish arguments about this social media behemoth.
The bullish view on Meta
Investors are always looking for the next great company to invest in. But many times, some of these best ideas lie in plain sight. And I'm talking about Meta.
The first thing the bulls will point out about Meta is its hugely profitable business. In the last five years, revenue grew from $41 billion in 2017 to $117 billion in 2022, and net profit ballooned from $16 billion to $29 billion.
Meta's hugely profitable business was a testament to the strength of its digital advertising business. With over 3.8 billion monthly active users (MAUs) across its platforms, including Facebook, Instagram, and WhatsApp, the company has built a vast social network that is difficult for competitors to replicate.
The more users who join Meta's platforms, the more valuable the network becomes -- thanks to network effects -- creating a self-reinforcing cycle that strengthens the company's position in the market. This position, in turn, makes Meta indispensable to advertisers.
And with so much cash flow coming in each year, Meta has the firepower to reinvest in the metaverse -- an emerging market that involves virtual worlds and immersive experiences that span multiple platforms and devices. In 2021, the company invested $13.7 billion into this segment, about one-third of the profits of the advertising business.
Meta is well-positioned to take advantage of the metaverse opportunity, given its existing technical expertise, financial resources, and user data. While there is no guarantee that the venture will be successful (more on this in the next section), this investment could open up new markets that are even bigger than Meta's existing business.
The bearish view on Meta
The bulls might have touted the strength of Meta's gigantic user base. The bears, however, see that as the downside of investing in the company.
With 3.8 billion MAUs across its family of apps (Facebook, Messenger, Instagram, and WhatsApp), Meta has reached most of the global population -- excluding China, since the Chinese government has banned Meta's services in the country. Understandably, it can no longer count on growing its user base to keep its growth machine spinning.
This is not to say that the advertising business can no longer grow. For example, Meta can improve its monetization of WhatsApp and Reels and grow Facebook's overseas average user revenue. Still, investors should be realistic about the future growth rate of Meta's advertising business. It is challenging to sustain a high double-digit top-line growth rate when the company is already reaping close to $30 billion per quarter in revenue.
At this point, the bulls will point out the immense opportunity for future growth thanks to Meta's investment in the metaverse -- JP Morgan expects the industry to be worth $1 trillion in revenue.
The bears, however, are not overly optimistic about Meta's massive bet on the metaverse for a few reasons. First, the metaverse is an unproven concept. Hence, the bet on this industry poses many unknowns and uncertainties. We do not know which type of hardware, software, and business models will work in this emerging area.
Second, the bet on the metaverse is exceptionally costly. It takes enormous financial resources and management attention to make the venture work. While Meta can afford to spend heavily, this moonshot project will damage share value significantly if it fails.
So instead of splashing substantial cash reserves on the metaverse, investors would prefer that Meta spend time and resources on improving the moat of its golden goose and return the excess cash to shareholders via methods like share buybacks.
So what does all this mean to investors?
There are valid reasons to be bullish and bearish about Meta. The bulls are excited about the company's highly profitable business, competitive advantage, and potential to generate cash for many years, which can be reinvested in the metaverse.
On the other hand, the bears argue that Meta's massive size impedes its growth rate, and the metaverse is an unproven concept that could be a value-destroying bet. Investors should be ready for a volatile ride regardless of the camp they're in right now.
