Meta Platforms, Inc. (FB) shares are down ~35% this year, and investors remain concerned about the company’s growth prospects. In February, Meta released fourth-quarter and full-year 2021 earnings results that missed Wall Street’s estimates. To make matters worse, the company issued lackluster guidance for Q1 as well.
In the last quarter, Meta saw its first-ever quarter-over-quarter drop in daily active users. Increasing competition, as well as recent changes introduced by Apple, Inc. (AAPL) to limit data tracking by third parties, paint a challenging future for Meta. However, its advertising business has more room to grow internationally.
As the creator economy grows, there is now a range of new social media apps challenging Meta’s dominance as well. Amid all these challenges, Meta remains laser-focused on rebranding itself as a metaverse-oriented tech company. Its investments in the creator economy could help the company more than make up for lost revenue from the advertising segment. Both WhatsApp and Instagram remain under-monetized too.
For all these reasons, I am bullish on the prospects for Meta Platforms stock.
Investments in the Creator Economy and the Metaverse
Meta Platforms has made significant investments in VR and AR to create a metaverse that is accessible via a variety of devices, allowing people to work, socialize, and play. The company has already announced plans to invest $10 billion in expanding its brand beyond traditional social media platforms.
Meta Platforms recently announced that it would soon begin testing tools for selling digital assets and experiences within Horizon Worlds, its virtual reality platform. Meta will allow a hand-picked group of Horizon artists to sell virtual objects and effects on the company’s immersive platform, which can be accessed via VR headsets. Creators can also sell access to a VIP section of their world.
Meta is likely to take a percentage of revenue creators will earn through this service, which will enable the company to build a new recurring revenue stream. Meta will be working on enabling advertisements for Horizon as well since the company already has the necessary expertise to build ad-based platforms.
Meta Platforms is testing a creator bonus program to go hand in hand with its other investments in the creator economy. The company has established a $10 million creator fund to reward developers who create the most interesting worlds with the highest engagement.
Under this program, selected Horizon Worlds users in the United States will be paid monthly for using all of the new features that the company introduces. This bonus program is intended to encourage creators to build and expand their virtual worlds using its tools and features. These bonuses are not subject to fees because they are determined mostly by the interaction a creator’s world receives.
According to a report published by The Verge, in February, the platform had 300,000 monthly users in VR. In addition, Meta also announced that 10,000 worlds have already been created, which shows that Meta’s immersive world vision is taking shape and that there are numerous ways the company can profit in the foreseeable future.
Horizon Worlds will be launched for smartphones later this year, which could be an inflection point in achieving the ambitious goals set out by the company.
As Meta’s virtual world gains traction, the company is preparing to add virtual tokens and cryptocurrencies to its social media apps to reward creators and provide loans and other financial services. Meta Financial Technologies, Meta’s financial unit, has been working to create a virtual currency for the metaverse, internally dubbed Zuck Bucks, which might come in the form of in-app tokens that are centrally controlled by the company.
Although these efforts are still in the early stages, if successful, they will provide a new revenue stream for the company. Earlier this year, Meta joined the Crypto Open Patent Alliance, a consortium of companies led by Jack Dorsey that has pledged to promote open access to cryptocurrency technologies.
With the metaverse already creating a hype, there are rising concerns about its environmental impact. While companies are still figuring out how to reduce the metaverse’s negative environmental impact, Meta Platforms and a few other leading tech companies, such as Alphabet (GOOG), Shopify (SHOP), and McKinsey & Co. have invested in the Frontier Fund, which will purchase carbon offsets from startups.
This is another positive development, as embracing ESG practices to create a more sustainable future is likely to be rewarded by the market in the long run.
Irrationally Punished for Pursuing Growth Opportunities
Investors were spooked by the deteriorating operating margin of Meta Platforms in the last quarter. Still, a deep dive into the company financials reveals this was the result of aggressive investments in the metaverse.
These investments will take years to show positive returns, but as investors, staying patient is key to booking handsome returns in the long run. As a company that has proven time and again its ability to create shareholder wealth, Meta Platforms seems to be doing the right thing by sacrificing short-term earnings to focus on the long-term earnings power of the company.
Wall Street’s Take
Based on 47 Wall Street analysts offering 12-month price targets, the average Meta Platforms price target comes to $317.61, which implies 46.2% upside potential from the current market price.
Meta Platforms is currently valued at a price-to-earnings multiple of 15.8. The company has never been valued this cheaply ever since its IPO.
Meta Platforms, on the one hand, is focused on investing for the future. On the other hand, the company is focused on diversifying its revenue streams to offset the negative impact resulting from the external challenges to its advertising business. The cheap valuation today provides a good opportunity for investors to consider adding Meta stock to their portfolios.
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