Of the "Magnificent Seven" stocks, Meta Platforms (META -1.22%) delivered the second-best performance in 2023. Its shares soared by 194% last year, behind only Nvidia's 239% gain, and in doing so managed to make up for its disappointing 2022 losses.
That's some strong momentum that was certainly driven by shareholder optimism. But where will the social media juggernaut be in five years?
The popular apps will still dominate
It's easy for investors to try to focus on things that will change in the future. But I think it's worthwhile not to ignore things that will stay the same. In this case, I'm confident that Meta's social media apps will continue to be the crown jewel of the company.
Meta's "family of apps" segment, which includes Facebook, Instagram, WhatsApp, Messenger, and Threads, counted 3.96 billion monthly active users as of Sept. 30. This means that almost 50% of the world's population of 8 billion uses a Meta digital property at least once per month. This demonstrates truly how dominant and far-reaching the business is.
If you think this segment is done growing, you'd be mistaken. The family of apps segment's user base expanded by 7% year over year in 2023's third quarter, and its revenue rose 23% to $34.1 billion. Its growth in the U.S., Canada, and Europe appears to be flattening, but Meta has growth potential when it comes to users and revenue in developing countries, especially as more people in those nations start to use the internet.
From a competitive perspective, the family of apps division is critical to Meta. It provides the business with a massive economic moat thanks to the presence of powerful network effects. Good luck to any upstart, no matter how well funded, that tries to launch a competing social network.
If we look out five years from now, there's no doubt in my mind that the bulk of Meta's revenue and earnings will come from its popular social media applications.
Metaverse optionality
There is one area of the company that could become a bigger driver of its financial results going forward, though, and that's the Reality Labs division, which houses Meta's metaverse-related projects. These include hardware products as well as software and service applications.
It's impossible to predict how this segment will perform in the medium to long term. Where it lands within the wide range of possible outcomes will depend heavily on whether or not the public broadly adopts metaverse applications.
The results so far are discouraging. Reality Labs generated revenue of $825 million through the first three quarters of 2023 -- less than 1% of Meta's total sales during that period. Through that same period, it reported an operating loss of $11.5 billion.
However, CEO Mark Zuckerberg believes that the metaverse will be the next prominent computing platform. If he's right, the tens of billions of dollars he's pouring into developing Meta's version of it could put his company in the driver's seat after the shift to it happens.
Right now, its apps have to play by the rules of the two companies with the dominant mobile operating systems: Apple (iOS) and Alphabet (Android). If Reality Labs eventually provides the most popular operating system for widely used metaverse apps, Meta will call the shots on that platform. And it could use that success to further boost its digital advertising capabilities, resulting in far greater revenue and earnings potential.
Consider buying the stock
To begin to estimate where Meta's stock might be five years from now, we have to start with today's valuation. Shares currently trade at a price-to-earnings ratio of 34. That doesn't look cheap, despite how dominant the company is in its arena. But on a forward basis, its P/E is 23, which is more attractive.
It's not hard to assume that Meta will be able to grow its earnings per share in the double-digit percentage range for the foreseeable future. That's what the business has done historically, and with a greater focus from management on driving efficiencies, it's likely to continue doing so.
This makes Meta a smart stock to buy and hold.
