Meta Platforms (META 3.77%) has benefited from increased ad activity on its platform. The company has been delivering some improved growth numbers of late, and investors have become bullish on the tech stock this year. Shares of the company are up almost 160% year to date.
But before you think about jumping on this bandwagon, you should prepare yourself for some volatility in the future. This could prove to be a risky stock to add to your portfolio right now.
The metaverse will be a drag on earnings for years
The big problem with Meta always leads back to the metaverse and its Reality Labs business. It doesn't generate much money, and it may never be a significant part of the company's operations. So far this year, the company's Family of Apps segment, which includes popular social media apps Facebook, Instagram, and WhatsApp, has generated over $60 billion in revenue. Reality Labs, by comparison, has brought in $616 million.
That might seem reasonable for a new business, but consider that it has also incurred $7.7 billion of losses in the same period. Meanwhile, the Family of Apps business, which posted $24.4 billion in profit, has allowed Meta Platforms to remain in the black. But on a year-over-year basis, overall operating income of $16.6 billion is down 2%.
And this is with the company's core business doing well. Should its core operations struggle, the bottom line could seriously falter. And investors shouldn't forget the company continually warns that operating losses from Reality Labs will "increase meaningfully year-over-year due to our ongoing product development efforts."
NASDAQ: META
Key Data Points
Meta Platforms isn't a cheap stock anymore
Investors often have short memories, and it wasn't too long ago they were bearish on Meta's outlook due to the company's lack of growth. In 2022, the tech stock was in the midst of a significant free fall, shedding 64% of its valuation.
The company's surge in price this year puts the stock around where it was at the start of 2022. But what once looked like it was one of the best deals in tech now looks overpriced with investors paying a hefty earnings multiple for Meta compared to its five-year average:
Data by YCharts.
A lack of growth isn't a huge problem when the stock is trading at a discount. But now, with a steep valuation, it may only be a matter of time before investors turn bearish on the stock once again. The company's revenue growth did improve last quarter, but it was also going up against soft numbers in the year-ago period.
Data by YCharts.
Meta Platforms could make for a volatile investment
If not for Reality Labs, Meta's business would be promising. But as long as that's going to be a key part of its growth strategy, investors should brace for volatility. Meta's growth rate jumped last quarter, but it still faces significant competition like TikTok. And if its Family of Apps business can't generate earnings growth at a faster rate than Reality Labs is incurring losses, the sell-off the stock saw in 2022 could return.
Meta is a risky stock to be holding with its valuation at these levels. and it will require the company's Family of Apps business to be firing on all cylinders for it to continue to draw in growth investors. A big test will come later this month when the company reports its latest round of earnings.
