Meta Platforms | Fundamental Analysis

Meta Platforms, formerly known as Facebook, has been getting a lot of attention lately, primarily because of the reasons that led to the name change. The company has stressed that it will actively invest to become a leader in the metaverse. The move has divided investors into two camps.

On the one hand, the move to the metaverse expands the overall addressable market, which could provide revenue growth for more than a decade. On the other hand, some investors worry about the resources of time and capital that Meta Platforms can devote to a project with uncertain results. Nevertheless, the company's core business, social media, is experiencing steady user and revenue growth on a huge scale. Let's try to better understand Meta Platforms' business and determine if the stock is worth buying, selling, or holding in 2022.

As you know, Meta Platforms' business is fueled by its family of social media apps, including Facebook, Instagram, and WhatsApp. These three apps bring together 2.8 million daily active users. More than a quarter of the world's population logs into one of Meta's apps every day. That's impressive and quite appealing if you're a marketer.

Meta apps are free to connect and use; the company makes money by showing its users ads. Of course, marketers are willing to pay more if their ads can be delivered to more people. What makes Meta's user base even more attractive to advertisers is that people are willing to reveal information about themselves, such as age, marital status, favorite movie, etc. Marketers can use all this information to target ads more effectively.

Improving efficiency increases the return on investment that markets get from advertising spending. For example, if a person reports that their favorite movie is "The Avengers," that's probably the perfect candidate to send out an ad for "Eternals," which is coming out in theaters right now. And as long as marketers see a good return on their investment in advertising in the Meta family of apps, they'll keep spending money.

And indeed, they do. Almost all of Meta's revenue comes from advertising, and the company's annual revenue has grown 45.8 percent over the past decade. Meta's social media business is doing pretty well, although revenue growth has slowed for four years in a row. This may be one of the reasons that prompted the company to announce an aggressive investment in creating a metaverse.

To help quantify the investments Meta will make in creating a meta-universe, the company is creating a new Facebook Reality Labs (FRL) reporting segment. CFO Dave Wehner said this segment will impact the company's $10 billion in operating income in the fiscal year 2021 and even more in subsequent years. The costs will certainly be high, but the rewards may be worth it, as CEO Mark Zuckerberg aims to have 1 billion users in the metaverse in about a decade.

Meta Platforms has a great business, and with its investment in the meta-universe, there is the potential for revenue growth over the next decade. The company's stock is also not expensive. On the contrary, trading at a price to free cash flow ratio of 26.5, they are near the bottom of their range for the past five years. The same can be said for the price-to-earnings ratio, which is 23.5. Great prospects right now, huge potential over the long term, and an inexpensive price point that makes Meta Platforms stock a buy for 2022.