Meta Platforms (META +0.30%) may be one of the most polarizing stocks on the market today. Some investors think it's an incredible value stock, while others think it's destined to burn through its goodwill with social media users as it burns billions in cash trying to build the metaverse.
As most investments go, there isn't one right answer for Meta. The company has positives and negatives. So let's go through the two biggest that potential investors need to weigh.
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Green flag: The core business is an absolute juggernaut
In 2022, Meta's Family of Apps segment -- which includes Facebook, Instagram, and WhatsApp -- generated revenue of $114.5 billion and an operating income of $42.7 billion. Put another way, the company's $456 billion market cap is just 10.7 times the operating income of the core business.
Admittedly, revenue was down slightly and operating income was down from $56.9 billion a year earlier. This was partly because of higher costs and partly because of changes related to how Apple regulates apps' ability to track users on its iOS platform, which Meta said had a $10 billion annual impact on the business. But this impact will likely be offset over time as Meta adjusts to the changes, and I think operating income could grow as a result.
The core social network and advertising business is the core strength at Meta, and if the company focused on that alone this could be a great investment. But it doesn't, so there's more to understand.
NASDAQ: META
Key Data Points
Red flag: Reality Labs is a disaster
Let's cut to the chase. Reality Labs, founder and CEO Mark Zuckerberg's grand plan to build the metaverse, is a disaster. In 2022, revenue for Reality Labs fell 5.1% to $2.2 billion, and operating loss rose 34.6% to $13.7 billion. Yes, Reality Labs burned through more than one-third of the operating income generated by Meta's entire family of social media apps.
There is currently no evidence that the company's bet on virtual reality, augmented reality, and other metaverse-related technologies will ever pay off. Users are more enamored with artificial intelligence than they ever were with virtual reality. Given the scale of the investment, this is a big red flag for investors.
One problem is that this is Zuckerberg's personal project, and he has complete control over the company. His voting rights outweigh those of all public investors. So there's really nothing investors can do but hope that the metaverse investment pays off, someday.
A mixed bag for Meta Platforms
It's easy to see value in Meta's business given the incredible amount of cash generated by the company's social media apps and advertising business. And recent cost reductions could improve operating profits even further.
But there's a cloud hanging over the company's metaverse ambitions that have both burnt tens of billions of dollars in cash and also distracted the company from its core business. Investors need to weigh the positives and the negatives of this strategy because the metaverse efforts being made don't seem like they are going anywhere.
