While interest in the metaverse cooled down substantially in the past couple of years, I don't think investors should completely ignore this potentially game-changing technology. There are places to allocate capital to benefit from this trend. And if things work out, the potential for strong returns is certainly present.
Among the many metaverse stocks out there, Meta Platforms (META -0.05%) is probably the best one to own. In fact, it might just be ready to go on another bull run, even after shares skyrocketed 150% this year.
A virtual world
It's understandable if many investors still can't wrap their heads around what exactly the metaverse is. It's essentially a virtual world where users can interact with each other, with various use cases like gaming applications, productivity tools, and other entertainment options. The world is only getting more digital, so the metaverse is viewed by Meta founder and CEO Mark Zuckerberg as the next frontier of the internet's evolution.
Meta has been focused on the metaverse for a few years now. The business sells glasses and headsets that allow consumers to experience the metaverse. Moreover, Meta developed Horizon Worlds, a virtual universe with different experiences for users. The company even restructured itself to separate the Reality Labs division, where metaverse initiatives are housed, from the social media applications that most are familiar with.
Zuckerberg sees the metaverse eventually attracting 1 billion users, a huge ambition for sure. But his lofty expectations are understood. Up to this point, Meta (previously known as Facebook) has had to play by the rules of the dominant mobile operating systems, which are Apple's iOS and Alphabet's Android. It's clear that the CEO's goal is to create an entirely new computing operating platform that Meta can own and operate, which would be a financial boon for the overall business.
However, we are a long way from that outcome. Reality Labs lost a lot of money thus far, with operating losses totaling nearly $8 billion through the first six months of 2023 and almost $14 billion in all of 2022. "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," CFO Susan Li said on the second-quarter earnings call.
Investors might be disappointed with this new focus from the management team, especially from a financial perspective. But based on Zuckerberg's track record, it's hard to bet against him. Ultimately, time will tell whether the metaverse works out.
Supported by a crown jewel
Besides having one of the best tech minds in the world at the helm, Meta's advantage over less accomplished and less financially sound metaverse businesses is that it has a completely different segment that is incredibly lucrative. I'm talking about the family of apps division, which includes Facebook, Instagram, Messenger, and WhatsApp. The ongoing success of these services provides the resources for Meta to keep investing in new technological shifts, like the metaverse.
Family of apps currently has a whopping 3.07 billion daily active users, a figure that increased 7% year over year. Revenue came in at $31.7 billion in the latest quarter, up 12% from Q2 2022. Even more impressive, this division generated a 29% operating margin. This gives Meta the cash necessary to focus on Reality Labs.
Even after Meta's stock climbed 150% in 2023 (as of Sept. 20), shares don't look to be overly expensive. They currently trade at an EV-to-EBIT (enterprise value to earnings before interest, taxes, depreciation, and amortization) ratio of 26, which is below the trailing-10-year average. That's not an unreasonable valuation to pay for such a dominant business that could have added upside should metaverse initiatives pan out as hoped.
Additionally, this just means that the stock is positioned well to continue its impressive run.
