While excitement around artificial intelligence has gone through the roof in 2023, investors shouldn't forget other potential innovations that could still present them with opportunities.
The metaverse, which its promoters say will be a persistent shared 3D digital world in which people will interact and engage in social, entertainment, and productivity use cases, was the talk of markets a couple of years ago. The excitement around that idea has died down, but that doesn't mean there aren't businesses still intensely focused on the technology.
Of all the metaverse stocks, I think Meta Platforms (META -0.39%) reigns supreme. Its massive scale and sizable financial resources indicate that it could be a winner over the long haul.
Building a new computing platform
Meta's Reality Labs division, which houses its augmented reality (AR) and virtual reality (VR) teams, sells products like the Meta Quest headsets and Ray-Ban Stories sunglasses. And it created Horizon Worlds (a virtual universe) and Horizon Workrooms (virtual meeting spaces where people can connect and collaborate). Moreover, Meta just announced a new gaming subscription service called Quest+.
The company's ambitions to build a fully immersive digital world became obvious a couple of years ago. "I believe the metaverse is the next chapter for the internet, and it's the next chapter for our company, too," founder and CEO Mark Zuckerberg said in 2021.
The issue shareholders had with this new direction and focus, however, was that no one really knows how much it will cost Meta to create its version of the metaverse, nor does anyone have any clue if it will be successful or profitable. Through the first six months of 2023, the Reality Labs division posted a $7.7 billion operating loss on just $600 million of revenue. The segment reported an operating loss of $13.7 billion in 2022.
"Finally, for Reality Labs, we expect operating losses to increase meaningfully year over year due to our ongoing product development efforts in AR/VR and our investments to further scale our ecosystem," Meta CFO Susan Li said on the Q2 2023 earnings call.
But Zuckerberg's perspective and outlook make sense, particularly as it relates to his goal of building a completely new internet platform. As mobile devices have become ubiquitous over the past decade, Meta has had to play by the rules of the companies behind the top mobile operating systems: Apple (iOS) and Alphabet (Android). If it succeeds in creating a popular version of the metaverse, Meta would be fully in control of its iteration of the platform, and other companies that want to reach its potentially huge user base would be at the mercy of Meta's rules.
Relying on a thriving segment
Compared to most earlier-stage metaverse businesses, Meta is in an advantageous position. It's able to invest so heavily in Reality Labs while absorbing massive losses because it also operates its extremely lucrative "family of apps" division. Combined, its Facebook, Instagram, WhatsApp, and Messenger apps had 3.07 billion daily active people in 2023's second quarter. That's nearly 40% of the entire global population. And while some fear that Meta's apps have already reached a level of ubiquity that will make further growth harder to come by, it's encouraging that the daily active people figure was up 50 million from three months prior and up almost 200 million from a year earlier.
The family of apps division generated revenue of $31.7 billion in Q2, with a 41% operating margin. It's why Meta can still produce ridiculous amounts of free cash flow and helps to explain how the business has such a pristine balance sheet, with a net cash position of $35 billion. Thanks to its strong financial standing, the company can adopt a long-term approach to building out the metaverse, making it the top stock to buy in the space.
