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Meta shares: Mark Zuckerberg’s Metaverse in context

Meta’s share price is being weighed down by disproportionately negative investor sentiment over the CEO's fixation on the Metaverse.

facebook Source: Bloomberg

In April, Meta (NASDAQ: FB) shares had fallen by 54% to $175 from their September peak, as the Nasdaq 100 social media company was hit by a cocktail of headwinds, including its first loss of daily active users in Q4 2021.

But after reassuring Q1 results, Meta’s share price has now recovered to $195. And for position traders with an appetite for risk, this could represent Meta’s best price point for the foreseeable future.

Meta share price: dominance in perspective

Meta may no longer be a trillion-dollar company. However, it’s still one of the largest on the NASDAQ. And tech peers with similarly outsized valuations, including Apple, Amazon, Microsoft, Tesla, and Alphabet, have also suffered a terrible 2022.

And despite increasing its userbase and buying back millions of shares, Meta’s share price is now valued the same as before the covid-19 pandemic stuck.

Its ‘family of apps,’ including Facebook, Instagram, and WhatsApp have an iron grip on social media use. In Q1 results, it boasted 3.64 billion monthly active people across its platforms, an increase of 6% year-over-year. Further, Facebook’s monthly active users alone rose by 3% to 2.94 billion.

For perspective, DataReportal research shows that 63% of the global population, or 5 billion people, have internet access.

Accordingly, 73% of the internet-connected population visits a Meta-owned site or app every month.

Its competitors are nowhere close. ByteDance’s TikTok reportedly has 1 billion monthly active users. Tencent's WeChat has 1.3 billion. Twitter has 229 million, and Snap 332 million. All are growing far faster than Meta, but Meta’s penetration is already at a globally significant level.

And despite the Q4 hiccup, daily active users rose in Q1. Revenue also increased by 7% year-over-year, and it expects to generate between $28 billion and $30 billion of revenue in Q2.

Long-term, Meta is a market-dominating money-making machine.

whatsapp Source: Bloomberg

The Metaverse in context

For some, CEO Mark Zuckerberg’s near-fanatical obsession with the Metaverse represents a headache-inducing headwind. Last year he argued ‘I believe the metaverse is the next chapter for the internet.’

In two days, the CEO is even changing the company’s NASDAQ ticker to META.

He’s not alone; Citigroup thinks the concept could become a $13 trillion market by 2030. Of course, not everyone is convinced. The unhappiness of at least some ‘Metamates’ is palpable, especially as long-time COO Sheryl Sandberg makes her exit.

However, with a $325 target on Meta stock, Mizuho analyst James Lee thinks ‘the depth of Meta’s bench should provide a smooth transition,’ and the company’s ‘established infrastructure and technology’ should help keep it on track.

JMP Securities analyst Andrew Boone concurs, arguing ‘Meta is a more mature business with set processes as Sandberg moves on… the company now has the infrastructure and processes in place to weather most departures.’

And context is important. It’s one thing for Zuckerberg to change the company’s mantra; it’s another to change its source of revenue.

The family of apps accounted for 97.5%, or $27.2 billion, of total revenue in Q1. The remaining $695 million came from Reality Labs, the Metaverse products division.

Reality Labs is becoming more expensive to operate, burning through $4.5 billion in 2019, $6.6 billion in 2020, and $10.1 billion in 2021. In Q4 2021, it spent $3.3 billion, more than twice the $1.45 billion Alphabet spent on ‘other bets’ such as AI cars.

And in this most recent quarter, the division lost the company another $3 billion, representing 20% of the company’s expenses.

But Zuckerberg knows ‘it’s expensive to build this, it’s something that’s never been built before. And it’s a new paradigm for computing and social connection… we expect to be meaningfully better at monetization than others in the space, and we expect that should become a sustainable advantage.’

The CEO might be throwing away this money, but it could just as easily be a sound investment from an incredibly successful entrepreneur.

Moreover, Meta generated nearly $118 billion in revenue and $29.4 billion in profit in 2021. It can comfortably afford to spend $1 billion a month on the Metaverse. If the concept never takes off, it can simply close Reality Labs at any point and retain the extra cash.

And with an attractive price-to-earnings ratio of just 15, Meta shares remain the world’s social media superpower.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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