This year, it seems that there's been no topic that has attracted more interest from investors than artificial intelligence (AI). But we can't forget that a couple of years ago, the metaverse was the technology drawing all the excitement. However, it has fallen somewhat out of favor among the investing community since then.
But the fact that the buzz has faded doesn't necessarily mean that the metaverse should be completely ignored as an investment thesis. While there are numerous metaverse stocks out there to choose from, I believe Meta Platforms (META) is the best business in the space to buy and hold for the long haul.
A new digital platform
The metaverse is a collection of persistent, shared 3D virtual worlds that will allow people to interact with others in new ways. Companies have proposed use cases in gaming, social, and productive environments. Meta's Reality Labs division houses its metaverse operations. The company sells hardware products like the Meta Quest and Ray-Ban smart glasses, as well as software and services like Horizon Worlds.
The metaverse is also an area where the business can develop its capabilities with artificial intelligence (AI). For those who buy the Ray-Ban smart glasses, Meta's AI voice assistant can answer questions and help to control different features.
This new technology all sounds exciting, but what do the numbers tell us? Although CEO Mark Zuckerberg has said before that he wants to introduce 1 billion people to the metaverse, it seems like the business is a long way off from this goal. Through the first quarter of 2023, only 20 million Quest devices had shipped in total.
Additionally, the Reality Labs division's finances look terrible. Through the first nine months of this year, it generated revenue of $825 million, but its operating loss has totaled a whopping $11.5 billion. And the situation not going to get any better anytime soon.
"For Reality Labs, we expect operating losses to increase meaningfully year over year," CFO Susan Li said regarding 2024 on the Q3 2023 earnings call. This is due to the company's ongoing investments to develop the technology and ecosystem.
Despite unfavorable financial results thus far, from a strategic standpoint, it's easy to see why Meta wants to continue focusing on its metaverse ambitions. As an app-based company, Meta has had to play by the rules of the major mobile operating systems, which are owned by Apple and Alphabet. If it can create a completely new computing platform that billions of users choose to interact with, Meta could make the rules that other companies will have to follow. And this could lead to new revenue opportunities.
Meta's financial resources
Due to its massive scale, Meta has the financial resources that most other metaverse companies lack. Plus, it has the tech talent to make notable progress. But its key advantage is that it can lean on another incredibly lucrative segment to bankroll the Reality Labs division -- it's Family of Apps segment, which includes Meta's crown jewels: Facebook, Instagram, WhatsApp, and Messenger. Their total daily active user base rose 7% year over year to 3.14 billion. And that segment generated virtually all of the company's revenue (over 99% to be exact) in the latest quarter, with an operating margin of nearly 52%.
Meta can funnel the copious cash that its bread-and-butter division generates toward its metaverse ambitions. And while some critical investors could argue that this is a lost cause, and assert that Meta should instead be directing that capital toward more aggressive share buybacks, it's difficult to bet against Zuckerberg's vision.
That's why this is the best metaverse stock to own for the long haul. Should things not pan out as hoped, there is a margin of safety for investors.
