Last week, Meta Platforms (META 0.35%) launched Threads, its answer to Twitter. Threads already has more than 100 million users, and it presents a new growth opportunity for Meta. But Threads also comes with challenges and risks.
Here are three reasons I think this might end up being a net negative for the company and why it doesn't make the stock a better buy.
1. It could be another money pit
Meta Platforms has a strong core business, but one thing that's weighing it down is the metaverse (i.e., its Reality Labs segment), where the company has been incurring billions of dollars of losses. My concern is that Threads could exacerbate those problems.
By launching Threads and going up against Elon Musk's Twitter, it could set the stage for an intense rivalry that also leads to Meta plunking down considerable money into Threads, for the sake of winning that battle.
Even if it doesn't cost Meta billions, the company's profits have been nosediving in recent years, and taking on another potentially costly venture could do more harm than good.
META net income (quarterly) data by YCharts.
2. Twitter's business isn't all that great
Expanding into a business that's similar to Twitter's may not be ideal, especially since that business model has struggled with profitability.
In 2021, when Twitter was still a public company, it reported a pre-tax loss of $411 million, largely a result of a litigation settlement from allegedly misleading investors about its user engagement numbers.
But even in the year before that, Twitter incurred an operating loss of just under $51 million.
It's possible that Meta could run a better operation in Threads, but it might not be easy. Fake news and misleading information are problems on Twitter just as they are on Facebook, so Threads may only end up multiplying Meta's problems.
If Threads is to be a serious rival to Twitter and its business model is similar, then it might not end up being a worthwhile move for Meta due to the losses and headaches that could come with it. Even if it wins the battle and becomes more popular, there may not be a big payoff for investors.
3. This could make Meta a bigger target for regulators
The biggest and perhaps most underrated risk related to the launch of Threads is that this can put an even larger target on Meta's back with respect to regulators. The Federal Trade Commission (FTC) has already been looking at breaking up Meta's business and for it to sell WhatsApp and Instagram.
That battle remains ongoing, and with Meta getting even bigger by creating a Twitter rival, that may only help prove the FTC's case that Meta has a monopoly on social networking services.
Threads is already topping 100 million users, but that's less impressive when you consider that all it involves is Instagram users simply clicking a few buttons and activating Threads; there isn't a sign-up process like there would be with a new service. So it's a good example of how Threads is piggybacking off an already successful social media platform in Instagram to quickly bump up its user numbers.
Instagram has more than 2 billion active monthly users, so even a small fraction of those users activating Threads would easily lead to significant "growth" for the new service. It may not take long for it to surpass Twitter, which has less than 400 million monthly active users. And although that may seem like a big win for Meta if that were to happen, it could also bolster the FTC's case that a breakup is necessary.
Meta Platforms stock is a risky buy
Launching Threads will open up more opportunities for Meta Platforms, but there will also be considerable risks that come with it. Twitter wasn't a lucrative business, and for Threads to go up against it could make it difficult to be profitable.
And if it does succeed, that could ironically make things worse for Meta in the long run since it could end up proving that its business is too strong and powerful for competitors.
Meta's stock has done exceptionally well this year, rising by more than 140%. But without an improvement in profitability and proof that it is going in the right direction, I'd be wary of investing in the tech company. The stock could end up giving back most of these gains this year if its upcoming quarterly results are underwhelming.
