Meta Platforms (META -0.28%) has been one of the hottest tech stocks to own this year, and its shares are up an incredible 165% in 2023. The company is coming off a strong earnings beat and investors are bullish on the stock once again. But before you buy the tech stock, there are two numbers you should take a close look at, as the business isn't exactly firing on all cylinders.
1. Reality Labs' operating loss was $3.7 billion in Q2
Meta is so convinced about the future of the metaverse that it changed its name and ticker symbol, and it has plunked down billions into a relatively new segment of the business that's focused on virtual reality -- Reality Labs. It's the company's devotion to this ultra-risky segment that makes Meta a much riskier buy than it otherwise should be.
In the second quarter (which ended on June 30), the company generated an overall operating profit of $9.4 billion, which was up 12% year over year. But that was purely due to the growth in its Family of Apps segment, which includes Instagram, WhatsApp, Facebook, and Messenger -- its core social media assets. Here's how the two segments have performed over the past four quarters:
Image source: Company filings. Chart by author.
The spending on Reality Labs isn't going away, and Meta isn't shy about it, either. On the company's Q2 earnings release, it stated that "for Reality Labs, we expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts in augmented reality/virtual reality and investments to further scale our ecosystem."
The company is giving investors a big, glaring warning that these losses will only get worse. Yet the stock can't stop rallying, and is now trading at more than 41 times earnings -- the average tech stock trades at a multiple of 34.
2. Reality Labs revenue was $276 million, and has been declining
In Q2, Meta Platforms reported just under $32 billion in quarterly revenue, which represented a year-over-year increase of 11% from the $28.8 billion it posted a year ago. The business is growing due to its strong Family of Apps segment. The ad market does appear to be stronger, and Meta is likely benefiting from government crackdowns on TikTok use and Twitter becoming less popular as well. The danger is that if that growth does prove to be short lived, Reality Labs may not be there to make up for any shortfall.
The segment doesn't account for a significant portion of Meta's business, but its sales were down again last quarter. Here's how the growth rate of these two segments has looked over the past four quarters:
Image source: Company filings. Chart by author.
It's one thing to invest in a growing business, but the Reality Labs segment isn't showing any progress. It is already a money pit, and while Meta is doing OK now because the Family of Apps segment is performing well, if it falters bearish investors could soon be back and ready to send shares of Meta back down again.
Meta isn't a stock worth buying right now
Meta isn't giving up on its Reality Labs business, and until that happens, this is a stock that investors should be extremely careful with. The stock has gotten fairly expensive, and it's not exactly a growth machine, either. At Meta's current valuation, there's a lot more risk than there is potential upside for investors.
