Most investors likely recognize Meta Platforms (META -4.13%) as the social media titan that reaches more than 3.8 billion people monthly through Facebook, Messenger, Instagram, and WhatsApp. They also probably know it's struggled over the past year with Apple's (AAPL -1.22%) privacy update on iOS, which crippled its ability to craft targeted ads from third-party data, and intense competition from ByteDance's TikTok, which lured away a lot of its younger users.
Meta is still a divisive stock. The bulls believe it can overcome its near-term challenges with new advertising tools and Reels' short videos, while the bears see it as an aging tech giant which is losing its relevance in a changing world. I discussed Meta's strengths and weaknesses in previous articles, but today I'll dive deeper into three other aspects of Meta's business that smart investors should also be familiar with: its VR plans, its AI ambitions, and its interest in challenging Twitter.
Image source: Meta Platforms.
1. It will keep burning billions of dollars in the metaverse
Meta's Reality Labs division, which houses its VR and AR products, has burned billions of dollars over the past four years:
|
Reality Labs Metric |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|
|
Revenue |
$501M |
$1.14B |
$2.27B |
$2.16B |
|
Operating Loss |
($4.50B) |
($6.62B) |
($10.19B) |
($13.72B) |
Data source: Meta Platforms.
That spending might have seemed justified when its Reality Labs revenues were soaring from 2019 through 2021, but the segment's growth ground to a halt in 2022. Meta initially gained some traction among mainstream consumers with its launch of the stand-alone Quest VR headset in 2019, and that momentum continued with the launch of its smaller and more powerful Quest 2 headset in 2020. Meta also attempted to capitalize on the Quest's popularity by launching more VR games and connecting its VR users to each other through its Horizon Worlds VR playground.
Meta recently claimed to have sold about 20 million Quest headsets over the past four years, but Horizon Worlds only reportedly hosted about 200,000 monthly users in late 2022. Therefore, it seems like a lot of people simply tried out the Quest instead of sticking with it. That's troubling since Meta is likely selling the Quest at a loss in hopes of covering its costs through its sales of higher-margin VR applications. There are also other signs this nascent market is flickering out: According to CSS Insight, global shipments of VR and AR devices tumbled 9.6% in 2022.
Yet Meta remains committed to expanding this money-losing business. During its latest conference call in April, CFO Susan Li predicted the Reality Labs segment's operating losses would "increase year over year in 2023." CEO Mark Zuckerberg also reiterated his belief that "building the metaverse is a long-term project."
2. It's developing its own AI chips
Meta's data centers currently use Nvidia's (NVDA -10.01%) high-end GPUs to accelerate their machine learning and AI tasks. But it's also been developing an in-house custom AI chip that could replace some of Nvidia's chips by 2025.
These Meta Training and Inference Accelerator (MTIA) chips will be programmable ASIC chips that can be customized for specific tasks. And unlike the current setup for AI processing -- which generally requires a GPU to accelerate tasks for a CPU -- these ASIC chips could handle all of those tasks on their own without stand-alone CPUs or GPUs.
Meta recently poached an AI chipmaking team from the British chip designer Graphcore to accelerate the development of these in-house chips. Nvidia's investors should pay close attention to that move since Graphcore previously claimed its "graph processing" approach can tackle AI tasks more efficiently than CPUs or GPUs. Meta's AI chipmaking efforts might squeeze its near-term margins, but they could also enable its data centers to operate more efficiently over the long term.
3. It could challenge Twitter in the near future
Lastly, Meta has reportedly been testing out a Twitter-like app for Instagram. The details are sparse at the moment, but it could be a decentralized text-based platform that works with Twitter's smaller competitor Mastodon and other apps.
If Instagram actually launches that app, it could capitalize on the chaos at Twitter and gain some traction as an alternative "town square" app. It could also enable it to capture more first-party data to craft better-targeted ads.
Which of these issues will move the needle the most?
These three things probably won't matter as much as Meta's near-term challenges with Apple and TikTok. However, investors should still keep a close eye on its steadfast commitment to AR and VR products -- which will either end in a financial disaster or give it a firm first mover's advantage in those two next-gen markets. Its development of AI chips and a clone of Twitter are worth keeping an eye on, but they probably won't move the needle as much as its ambitious metaverse plans.
