Meta Platforms (META -2.58%) has invested a huge sum of cash into developing its virtual and augmented reality technology and the software and social platforms to support its hardware. Unfortunately, the business doesn't have much to show for it so far.
Reality Labs, the division of Meta housing its metaverse technology, generated a total of $6.3 billion in revenue over the past three years. That's resulted in an operating loss of $40 billion. And management expects 2024's operating loss to exceed the $16 billion it lost last year. That's a phenomenally large bet on the future of computing.
While Meta Platforms' detractors decry the amount of spending Mark Zuckerberg and his team are putting into developing virtual and augmented reality platforms, investors shouldn't overlook the fact that it's spent about twice as much on something else entirely over the past three years.
Since 2021, Meta Platforms has bought back $92 billion worth of its own stock. As of the end of 2023, it had $31 billion available and authorized for repurchases, and it added another $50 billion to that authorization at the start of February.
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Investing in the future while returning cash to shareholders
Meta's massive step-up in share repurchases over the past three years is an indication of the strength of its operations and balance sheet.
Meta generated $43 billion in free cash flow in 2023. That's a huge bounce-back from the $18.4 billion it generated in 2022 and up from the $38.4 billion generated in 2021. 2022 was a bit of an anomaly for Meta, as a pullback in advertising spending combined with Meta's massive increase in capital expenditures curbed its financial results. However, the return to growth in 2023 indicates the long-term strength of Meta's business.
Importantly, Meta's capital expenditures are mostly related to its Family of Apps business, not Reality Labs. It's spending on data centers and servers is for its artificial intelligence, which powers everything from its ads business to its content recommendation algorithm. Reality Labs spending is mostly tied to research and development (R&D).
R&D spending has consistently climbed higher, but has largely stayed in line with revenue. That said, Meta spends more as a percentage of revenue on R&D than its peers. But with a strong operating margin, that shouldn't be a concern for investors.
All this means Meta's ability to invest in the future, including things like the metaverse and AI, doesn't curb its ability to return cash to shareholders through repurchases and its newly initiated dividend.
Meta's future looks bright
Despite numerous challenges, Meta has been able to stave them off and continue growing free cash flow over time. There's very little chance that will change anytime in the foreseeable future.
Meta's network effect offers a protective moat. It counts nearly 4 billion monthly active users across its family of apps. That locks people into its apps, even when competitors pop up. We've seen Meta counteract the effect of new forms of entertainment (Stories, TikTok, etc.) by simply integrating similar features into its app and leveraging its network effect.
Continually improving its products, including its advertising products, requires a lot of investments. Still, Meta has shown strong operating margin expansion, and it should continue to show operating leverage over the next few years as it ramps up monetization of Reels, its TikTok competitor (which has been a drag on its results until recently).
While Meta's spending heavily on the metaverse, especially relative to the amount of revenue it currently produces, it's not spending an unreasonable amount. If it turns out to be the next major computing platform, as Zuckerberg thinks it will, the investment will prove well worth it. And given that it's growing its free cash flow, returning boatloads of cash to investors, and still spending enough to keep growing its core Family of Apps business, investors should remain optimistic about the future.
Even after shares have climbed to start the year, the stock trades for just 25 times forward earnings. With its massive share repurchase plans and strong outlook, it's worth paying the premium over the S&P 500 for the tech giant.
