In late 2021, Facebook announced that it would change its name to Meta. According to the company’s manager, Mark Zuckerberg, this change is due to the fact that the company intends to focus its investment in the metaverse area in the coming years. the metaverse consists of creating a virtual universe, in which you can perform a wide range of daily activities, such as playing games, shopping, going to shows, among others.. It is a concept and a technology that is still underdeveloped, so the universe of its applications can have great potential. It should also be noted that the company plans to increase its level of investment, due to the bet on the metaverse. In fact, in the year 2021, the company invested around 10 billion dollars in this area.Considering the quotation on the closing date of 11 July 2022, Meta has a market value of around US$440 billion. To get a sense of the real dimension of this value, the same is about double all the wealth generated in Portugal during the year 2021. It is one of the companies with the largest market capitalization in the world. the company’s value has fallen sharply since the beginning of the year, accumulating a drop of more than 50%. These drops are due to negative global situation, due to the expectation of an increase in interest rates. In addition, there are fears that an economic downturn will strongly affect the advertising market, on which the company is heavily dependent.
Company business areas
The company essentially has 2 business areas, namely:Social networksthat is, Facebook, Instagram, Whatsapp, among others;Virtual reality, in which the metaverse is included. In terms of the areas mentioned above, as would be expected, social networks are the “golden goose” of the company. Thus, at the end of 2021, revenues in the social media segment amounted to approximately 114.9 billion dollars, which corresponds to approximately 97.5% of total revenues in 2021.. In this way, the virtual reality segment still makes a minor contribution. In terms of revenue from social networks, they are almost entirely revenue from advertising. This business area, in addition to having a very significant volume of revenue, is also very profitable. For example, in 2021, the operational result of this business area was about 56.9 billion dollars, ie a margin of almost 50%.By opposition, the virtual reality areadespite low revenues, had a very significant loss in 2021, over 10 billion dollars. This is due to the fact that it is still in a development stage.
Evolution of the company’s revenue and profit
Meta has clearly been a growth company. Thus, over the last few years, it has shown very interesting growth in terms of revenue and profits, as you can see in the table below.Evolution of revenue, net income and earnings per share between 2017 and 2021 Revenue (in USD million) Net income (in USD million) Therefore, in relation to revenue, from 2017 to the end of 2021, practically tripled. On the other hand, the company results also had a very positive behavior, having more than doubled since 2017.In summary, comparing the earnings per share of 13.77 USD for 2021, with the current price at the closing date of 11 July, it appears that the price/earnings per share, is around 12x. In other words, this indicator is well below its historical average, which in the case of this company has been above 20x.
operational indicators
Therefore, the company essentially depends on the business and advertising on its social networks, so there is a set of important metrics that you must keep in mind when analyze business performancenamely:Monthly number of active users, that is, users who accessed Meta platforms at least once a month, such as Facebook, Instagram, Whatsapp, among others. In the case of this indicator, the company has seen growth in terms of users, and according to data from the first quarter of 2022, the total number reached 3.64 billion. It should be noted that this is a relevant indicator since the greater the number of users, the greater the company’s potential to have new revenues;Average revenue per user which is calculated by dividing the company’s total revenue in the social media business area by the monthly number of active users. The company’s objective is for this average revenue to be constantly higher, which has been happening in the case of Meta. Out of curiosity, for example in the first quarter of 2020, the average revenue per user was 6.03 USD. In the case of the first quarter of 2022, this revenue reached 7.72 USD, that is, a much higher value.
Opportunities and risks of investing
Investing in an action like Meta has opportunities, but also risks you should know about. Therefore, some of the company’s main potentialities are highlighted below, as well as possible investment risks.
opportunities
With regard to opportunities to invest in the company, the following stand out:Leading investment company in the metaverse areawhich could revolutionize our lives in the coming decades;Leading position in the social networks segment;History of strong revenue and profit growth over the years. Furthermore, it is expected that the social networks segment can continue to expand in the coming years;Very healthy financial situation of the companywith a great capacity to make new investments;the margins in its main business (social networks) are very robust.
Scratchs
Despite the opportunities identified above, there are, however, some risks that the company identifies as affecting its business, and therefore its profitability as a shareholder, namely: Most of the revenue generated by the company comes from advertising on the platforms, which are paid by companies and individuals (vendors). As a rule, to publish these advertisements on social networks, sellers do not have long-term agreements with Meta, and may abandon their platforms if they consider that they are no longer attractive or profitable to advertise their products and/or services. This way, the company’s high dependence on a single source of revenue, can be a problem;Risk of regulatory changes that may affect the company’s activity, that is, the success and effectiveness of advertising on Meta’s social networks depends on its algorithm, which basically, based on user data, selects the ads that are most appropriate and, in principle, that best meet their needs. interests. However, over the last few years, a set of data protection legislation has been launched, which limits Meta’s access to that same data, which can make its advertising less targeted, and therefore less effective;Risk of the metaverse area not having the success that the company expects, that is, Meta has invested heavily in this area, and even in 2021 it has already invested a very significant amount in the metaverse. It is still an area at an early stage, which is experiencing major losses. However, if in the future the company does not generate profits from this activity, it may have large and irrecoverable losses in financial terms.
To invest or not to invest? that is the question
Meta has been a company that over the years has had a very positive performance on the stock exchange. However, it does not necessarily mean that history will repeat itself in the future. It is a company with interesting growth in terms of revenues and profits, and with possible significant future opportunities. Nonetheless, There are also risks that you should take into accountand that could potentially compromise the business in the future. do your “homework” before deciding to eventually add Meta shares to your portfolio.
A professional writer by day, a tech-nerd by night, with a love for all things money.