Meta Platforms Inc. (META, Financial) has seen its shares surge more than 100% in 2023, outperforming the Nasdaq by a wide margin despite rising interest rates. This has been the result of two main factors, profitability and growth.
But there is arguably a top risk for the company, which is its acceptance of the metaverse. Is it a wise move to invest heavily in the metaverse when you have a cash cow like Instagram? I argue that it is too risky for Meta Platforms to support the development of the metaverse as pouring cash into an unknown project while reducing operating costs through significant layoffs does not make much sense.
Why shares have soared in 2023
The stock's performance may not be as sensitive to valuation as it is to growth and profitability. For Meta, this is true as it has a GF Score of 96 out of 100, very strong financial health and robust profitability and growth trends.
The gross margin of 78.4% is well above the interactive media industry's median value of 59.24%, while the net margin of 18.27% is far superior to the median value of -0.03% and the three-year revenue growth rate of 20.6% beats the median value of 6.75%. Meta Platforms has delivered a mix of profitability and growth in the past three years that is very remarkable. What about its prospects? The future total revenue growth rate for the next three to five years is estimated to be 9.3%, beating the median industry outlook for 9.16% growth. At the same time, Meta shares appear to be significantly undervalued based on its GF Value of $388.28.
Given these trends, the question to ask is why Meta Platforms decided to invest in the metaverse and not just focus on Instagram.
Metaverse has many business risks now
The concept of the metaverse is still evolving, and its exact implementation and characteristics may vary in the future. However, based on the current understanding of virtual worlds, there are some potential business risks associated with operating in the metaverse.
First, there are severe technical challenges. Building and maintaining a complex and immersive metaverse environment can be technically challenging. Issues such as scalability, stability and compatibility across different platforms and devices may arise, affecting the user experience and business operations.
Then there are important security and privacy concerns. As with any digital platform, the metaverse can be susceptible to security breaches, hacking attempts and privacy concerns. Protecting user data, preventing unauthorized access and ensuring the integrity of virtual assets will be critical for businesses operating in the metaverse.
Meta Platforms should consider the risks of regulatory and legal uncertainty and economic volatility. The metaverse operates across geographical boundaries, making it difficult to determine which jurisdiction's laws and regulations apply. As a result, there may be uncertainties regarding taxation, intellectual property rights, user protection and other legal aspects. Adapting to evolving regulations and maintaining compliance can pose challenges for businesses. The metaverse may introduce its own virtual economy, with virtual currencies, assets and marketplaces. However, this virtual economy can be subject to fluctuations, market manipulations and economic risks. Businesses heavily reliant on the metaverse economy may face uncertainties in terms of revenue generation and profitability.
The social media giant should also focus on analyzing user adoption and retention. The success of any metaverse platform depends on user adoption and engagement. Convincing users to invest time and money in a virtual environment requires providing compelling experiences, content and social interactions. Failing to attract and retain a critical mass of users can impact the viability of metaverse businesses. Producing content online comes with risks related to content moderation and governance. Virtual worlds can be subject to misuse, including harassment, hate speech and inappropriate content. Establishing effective content moderation systems and governance mechanisms to ensure a safe and inclusive environment can be a significant challenge for metaverse platforms.
Interoperability and standardization is another concern. The metaverse may consist of multiple interconnected virtual worlds and platforms. Achieving interoperability and standardization across these platforms can be complex, potentially leading to fragmentation and compatibility issues. Businesses operating in the metaverse may face challenges in integrating their services and assets seamlessly across different virtual environments.
Finally, the metaverse raises concerns regarding the protection of intellectual property rights. Unauthorized use or replication of copyrighted content within virtual worlds can lead to legal disputes and financial losses for businesses.
It is important to note the metaverse is still an emerging concept, and the above risks are based on current understanding. As the metaverse evolves and matures, new risks and challenges may emerge, requiring businesses to adapt and develop strategies to mitigate them.
Instagram is a recurring cash cow machine
Instagram has shown strong revenue prospects since being acquired by Facebook in 2012.
The first is advertising, its primary source of revenue. The platform offers various ad formats, including photo ads, video ads, carousel ads, stories ads and explore ads. Instagram's extensive user base and engagement make it an attractive platform for advertisers to reach a wide audience. As a result, advertising revenue has been a significant contributor to Instagram's success. With a massive base of over 1 billion monthly active users as of 2021, Instagram provides advertisers with a broad reach and potential customer base. Moreover, Instagram users are known for their high engagement levels, spending a significant amount of time on the platform, which increases the likelihood of ad interactions and conversions.
Instagram fuels influencer marketing by enabling brands to collaborate with influencers to promote their products or services. Influencer marketing has grown substantially in recent years, with Instagram's visual nature and emphasis on personal branding making it a preferred platform for collaborations. This trend has created additional revenue streams as the platform can facilitate and monetize these partnerships.
There are tons of e-commerce and shopping features for marketing, advertising and monetization. Instagram has been expanding its e-commerce capabilities, enabling businesses to sell products directly through the platform. With features such as shoppable posts, product tags and in-app checkout, Instagram aims to streamline the path from discovery to purchase, benefiting both businesses and the platform. These e-commerce initiatives have the potential to generate significant revenue for Instagram in the future. It has a track record of successfully monetizing new features and functionalities. For example, the introduction of Instagram Stories led to increased engagement and ad revenue through the inclusion of ads within Stories. As Instagram continues to innovate and introduce new features, it can explore monetization opportunities to further enhance its revenue prospects.
Meta Platforms now has a fledgling business project with an uncertain future, which is the metaverse, and a very successful business, Instagram. The success of Instagram's revenue prospects depends on maintaining a balance between user experience and monetization efforts. Overwhelming users with ads or compromising the platform's integrity could potentially have negative consequences.
Therefore, Meta needs to carefully navigate these challenges while leveraging its vast user base and expanding advertising and e-commerce opportunities to sustain its revenue growth.
In conclusion, Meta Platforms seems like an attractive opportunity now, but from a business perspective, the metaverse project is too risky of an undertaking.
