In the past five years, shares of Meta Platforms (META +1.81%) have climbed 149%. That's a solid return although it has been anything but a smooth ride. Shares tanked 64% in 2022 as investors became overly pessimistic about the company's prospects.
Where will this "Magnificent Seven" stock be in five years? To come up with an educated guess, I think it's worthwhile to consider what could change and what will stay the same.
A social media powerhouse
During the three-month period that ended March 31, Meta reported having 3.24 billion daily active users across its family of apps. That includes some of the world's most popular social media services, like Facebook, Instagram, WhatsApp, and Messenger. That user base, while already gargantuan, expanded by 7% year over year.
Even though Meta is a daily part of the lives of 40% of the world's population, there's no reason to believe that in 2029, it won't still be a massive social media enterprise. Consequently, this means the business will probably still generate the bulk of its revenue from digital advertising.
In 2023, 98% of sales, or a whopping $132 billion, came from digital-ad efforts, putting Meta squarely behind Alphabet on the industry leaderboard.
The management team's focus on investing heavily in artificial intelligence (AI) initiatives is a strategy that should bear fruit over time. Users of the various apps can interact with Meta AI that improves the experience and makes it easier to find the information they're looking for. This could drive higher engagement.
Moreover, Meta has already launched generative AI features to better serve its advertising customers. There are claims being made that these tools could boost return on spend and cut down on labor hours. As advertisers view Meta as an invaluable partner, more ad dollars could flow its way.
NASDAQ: META
Key Data Points
A new world
Founder and CEO Mark Zuckerberg is always thinking about what comes next. He deserves tremendous credit for building Meta into a trillion-dollar company in about 20 years' time. But investors are skeptical about where his head is at now.
This relates to Meta's metaverse ambitions. The company already sells augmented reality glasses and virtual reality headsets that allow users to interact with the world and each other in new ways. "Zuck" is trying to build the next major computing platform.
The issue, though, is that these offerings aren't catching on. In the past 12 months, its Reality Labs business only generated a total of $2 billion in revenue. That barely moves the needle for Meta. It's been consistently losing huge amounts of money. Just in the last quarter, it posted an operating loss of $3.8 billion.
Zuckerberg hopes there will be 1 billion people using metaverse-related products and services one day. But based on the latest trends, it's difficult to see this happening anytime soon. I'd bet that even if Reality Labs really takes off, it will pale in comparison to the family of apps in terms of how they influence the company's financials.
Meta has optionality, but it's still a digital-ad enterprise at heart.
Buy Meta stock
There are very few businesses that can invest so aggressively behind unproven technologies, while still producing incredibly high margins and earnings. Even if Reality Labs becomes a flop, the core social media and digital-ad operations are so lucrative in their own right.
And this warrants a closer look from investors. Shares have skyrocketed 289% since the start of 2023. But they trade at a reasonably forward price-to-earnings (P/E) ratio of 26.7. This looks like a smart investment to buy and hold for the next five years.
