Meta Stock: Trillions can be created with metaverse potential (NASDAQ:META)

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Meta platforms (NASDAQ: META), formerly known as the parent company of Facebook, has 2 counterbalance sides to the long-term investment thesis, making it one of the most attractive potential long-term opportunities.

On the negative side of things, a Apple’s recent change (AAPL) regarding app security means that Facebook, or Meta, is not able to monetize their users for revenue as effectively, which has and will lead to lower advertising revenue for the foreseeable future.

On the bright side, the company has been emerging in the Metaverse/AR (augmented reality)/VR (virtual reality) market for quite some time now and is one of the major players in the industry. This market is set to explode over the next decade or two and could be worth trillions of dollars.

The real question for investors, assuming the revenue stream from the metaverse materializes, is whether the company’s current revenue stream from ads on its social media platform is enough to keep them at valuations. reasonable until the other revenue stream becomes large enough to justify the investment.

Let’s break them down.

Cons: Decline in organic revenue

This is nothing new for Meta/Facebook investors. The company relies heavily on tracking user activity across multiple platforms in order to more effectively target advertisements to said users. Apple’s recent change to these guidelines, which allows users to opt out of sharing this cross-platform data, has limited the company’s ability to do this effective advertising, leading advertisers to drop or renegotiate their spending on the platform.

This resulted in the company’s earnings falling short of expectations and declining compared to previous years, and the company’s share price falling significantly. This is because the company was trading at higher multiples due to high revenues and previously forecast EPS growth rates – both revised lower.

Even now that analysts expect the comparative decline in revenue to reverse somewhat and the company announces a slight increase in sales and earnings over the next few years, that rate of growth is expected to slow.

2022 2023 2024 2025 2026 2027
Sales $118 billion $131 billion $148 billion $165 billion $180 billion $191 billion
Growth +0.1% +11% +13% +12% +8.7% +6.3%

The issue here is not only that the company’s revenue growth should decline further, but after the initial boost, their margins should suffer as they require a sustained SG&A and R&D budget to ease the transition to the metaverse, AR and virtual reality markets. This means that while the company should enjoy higher margins than they currently do in the coming years, this should decline after 2026.

2022 2023 2024 2025 2026 2027
PES $9.78 $11.07 $12.82 $15.75 $15.91 $15.80
Growth -29.0% +13.2% +15.8% +22.8% +1.03% -0.70%

(Source: Seeking Alpha earnings estimate aggregator)

While these numbers may look bad for some long-term investors, I don’t think there’s any long-term cause for concern as the company moves into its other business segments and away from the exclusive reliance on advertising revenue from its social media platforms. Facebook, Instagram and others.

Positive from negative: transitions

Ultimately, even if revenue growth slows in the longer term from the company’s main organic ad revenue on social media, they have more than enough resources to get them to a place where they are a business. more diverse. Let’s dive into the numbers.

First, even though the company is underperforming the previously mentioned expectations, it still has $12.7 billion in cash and cash equivalents and an additional $27.8 billion in short-term investments, totaling more than 40 billions of dollars in liquid cash reserves. Even if their gross profit goes from $95 billion to $80 billion, their cash reserves can sustain them through the transition period, given that they’re spending about $50 billion on operating expenses, which can certainly be reduced, as the company said. .

They’re aiming to reduce costs by about 10% in the next quarter, which means the company will save about $5 billion on those costs, and they can certainly go even further if they need to.

Another positive here is that the company has no long-term debt, which means that for a short time during a transition period, it has the opportunity to exploit these markets, especially if we heading into a recession and interest rates coming back. to tackle this, which can easily sustain them through the 2030 to 2040 period of full metaverse, AR & VR adoption.

The positives: trillions of potential

This market breakdown is in 2 parts: metaverse and AR/VR.

According to market experts, the metaverse is expected to grow at a very high rate and reach over $1.5 trillion by 2029, with a CAGR of almost 48%. This industry is broken down into 3: software/platform, hardware and services. Meta does all 3 in one way or another, which means they have the potential to have a foothold in every segment and maximize their impact.

The reason I’m so optimistic about Facebook/Meta’s potential as a leader in the space is that their platform is already one of the biggest in the industry. What I mean by that is that they operate in key segments that are set to grow:

1 – social media is poised to be one of the major sub-industries in the AR/VR world and metaverse and Meta has both Facebook and Instagram, as well as potential with WhatsApp and Messenger. This means they are likely to retain a significant portion of the metaverse social media world as it shifts to AR/VR components.

2 – Shopping online is another one that’s set to become a big part of the metaverse with AR/VR measuring and trying on clothes, real-time celebrity matching and the like. Facebook’s Marketplace is one of the leading social e-commerce platforms in the world, and although they pale in comparison to companies like Amazon’s (AMZN) platform, they are investing heavily to make it a friendlier place for the billions of monthly users via Facebook and Instagram.

3 – Gaming and content creation are the other segments set to grow rapidly in the AR/VR and metaverse spaces, and the launch of Meta’s metaverse was already seen as a big source of community engagement. The deeper integration of these systems with Facebook and Instagram has the potential to lead millions of people who use these social media sites every day to join the system rather than create a new account through one new platform or another. The company’s Oculus is also an important part of Metaverse gameplay and content.

As such, I believe that in the early years of 2030 to 2040, Meta, with all of its current and potential subsidiaries, will hold a significant market share relative to other companies operating in this space.

Risks and investment Conclusion

The obvious risk here is competition. Companies like Apple are notorious for waiting for problems in certain new industries or features and then adopting them using their tens of billions of spare parts lying around. They, along with other large companies like Microsoft (MSFT) and other hardware manufacturers, social media platforms and more, present a tough competitive environment for Meta.

While I still believe Meta will hold a significant advantage over other companies, there is still a risk to keep in mind as the company’s ad revenue growth continues to decline as it invests heavily in this new industry, which may limit the amount of its cash flow. generate in the next 5 years or so.

Even so, with potentially trillions of dollars up for grabs worldwide in space through 2040 and with the company being almost the only one with a presence in several different segments, I think with a 15% market share at 25% (my own projection) in the early years of this rapidly growing industry – that Meta may be one of the best long-term investments for the next 20 years.

With ad revenue sales remaining relatively flat at around $200 billion per year and metaverse/AR/VR related sales growing at around 50% per year at the same levels, an annual sales growth rate from 2030 to 2040 of around 20% to 25% means that the company has the potential to be worth much more than its current stock price and grow by 20 to 25% per year.

As a result, I’m very optimistic about the company’s long-term prospects and believe it can adequately weather the advertising revenue storm as it invests and transitions to metaverse money.

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