Gene Munster, a senior research analyst at Piper Jaffray, argued in 2015 that Meta (META), which was Facebook at the time, had a 45% upside potential. The company traded just above $90, meaning Munster thought the stock could get as high as $130. He was right—eventually. the company's stock reached $130 in January 2017 and kept climbing, topping $200 in July 2018. It hit the brakes when the company released earnings with a disappointing outlook for future growth.
That had to happen sooner or later. In 2018, Facebook had about 2.3 billion global users and that figure climbed afterward. That’s almost a third of the world’s population and more than half of those with internet access. But the platform will eventually stop adding users and there are other challenges that couldn't be foreseen—notably, the fact that foreign political operators use social platforms like Facebook to spread false information to sway the opinions of millions of American voters.
Let's examine some of the other risks that exist for investors interested in Meta and Facebook, its best-known operation.
- Facebook is one of the world's most recognizable social media platforms with billions of users worldwide.
- Ad revenue accounts for around 98% of its revenue in recent years, making the company heavily dependent on this source of income.
- Aside from a drop in advertising, Facebook faces potential risks from regulators, user backlash, and increased competition in the social media space.
- Virtual reality the "metaverse," and artificial intelligence are areas of potential growth for the company, but their success is uncertain.
Dependence on Ad Revenue
According to the company's financial statementsin 2015, Meta receivedapproximately 90% of its revenue from advertising. That figure grew to 98% by 2017.
Since Facebook is so reliant on ad revenue, its fundamentals are not that different from cable or satellite firms. Apply a few telecommunications metricsand a funny pattern emerges. The company's average revenue per user (ARPU) in Q2-2015 increased by almost a quarter at 23%, despite total ad purchases declining by more than half at 55%. This is possible only because the cost of advertising on Facebook rose by 219%.
This means some ad users are getting fantastic results on Facebook but most are not, and this only further concentrates the company's lack of revenue diversification. As of Q2 of 2023, ARPU reached approximately $11 per user, worldwide.
Advertising has been very good for Meta, but a company that relies on one revenue source is not any different from an investor relying on one really strong security. It is better, or at least less risky, if the company has a diversified money stream in case advertising dollars dip.
Virtual Reality Unrealized
Seemingly every tech giant has been throwing serious money at virtual reality. Meta's purchase of Oculus, which went for a reported $2 billion, may turn out to be a winner.Or not.
Oculus tops a listof the most promising virtual reality initiatives of 2017, according to Datamation. As of 2023, the headset, now called the Meta Quest, is still ranked as the top choice for consumers by CNET. But, the publication suggests consumers wait it out until Apple's headset comes to market, which could change the landscape for VR.
The average number of minutes per day that people spent on Facebook as of January 2021. People spent the most time on Facebook, ahead of TokTok and X (formerly Twitter).
Social Media Competition
Meta has shown a propensity to mimic or buy out competitors. In 2012, the company spent $1 billion on Instagram. It made a far less lucrative purchase in 2014, buying the little-known WhatsApp for $19 billion. Those buys made strategic sense since the apps could have drawn users away from Facebook.
Rival apps come thick and fast. Meta cannot buy all of them, and one of them may even catch fire. Take Snapchat, a company Meta tried and failed to buy for $3 billion. Snapchat announced that it reached 397 million daily active users in the second quarter of 2023, which is a 14% increase on a year-over-year (YOY) basis. The company, though, has yet to show a profit.
It is hard to imagine Facebook going the way of MySpace, the once-dominant social site that is nowa footnote in internet history. Facebook's user baseof 3.03 billion monthly active users as of Q2-2023 dwarfs the MySpace peak of 75 million, and Facebook has much better cash flow, generating $10.96 billion in free cash flows.
But MySpace illustrates how quickly consumer tastes change. Facebook is entering its second generation of users—and younger Americans use Snapchat and X as frequently as they use Facebook. Google (GOOG/GOOGL) and Apple (AAPL), two players with longer track records, are challenging Facebook in the app install market, too.
Of course, the biggest risk to any stock is probably systematic risk, not specific. There is not much any company could have done in the buildup to the 2007-2008 financial crisis, especially one tied to housing or finance. The Nasdaq lost more than 75% of its value during the dotcom crisis, and it is difficult to predict if or when another free fall is coming.
In 2023, EU regulators fined Meta heavily for breaking new antiprivacy and antitrust laws,
There is also the chance of regulatory risk. Facebook uses what is still a relatively new technology, and social media is a relatively unregulated market. Since American industries tend to become more regulated over time, it seems likely Uncle Sam will increasingly have his fingerprints on social media companies. Poll any investor and ask if regulations are good or bad and the likeliest response is bad.
And that’s where the firestorm over the misuse of Facebook by political operators enters the picture. Facebook (either accidentally or on purpose) allowed data firm Cambridge Analytica to harvest the data of millions of its users, which made its way into the hands of foreign political operators duringthe 2016 U.S. election. These operators used the platform and others to spread false information throughout the election season. Meta is addressing these problems, but the government may decide it wants to as well.
In early 2023, European regulators fined Meta $414 million after it was discovered that the company had illegally forced users to accept personalized ads.The penalty carries significant implications for the company's advertising businesses (Facebook and Instagram) in the EU, which is a key market.
The 27-nation bloc passed a landmark data privacy law in 2018 in order to limit the ability of Facebook and other companies to collect user data without consent. This law has been found to have been violated by Facebook's lengthy terms of service, which effectively force users to either accept data collection or stop using the services.
What Are the Main Risks That Meta Faces?
Some of the risks to investing in Facebook's stock include the company's dependence on ad revenue, uncertainty surrounding the success of its virtual reality products and its foray into artificial intelligence, potential for government regulation, threat of competition from newer social media platforms, and potential backlash from users or advertisers over controversial content or data privacy issues.
How Much of Meta's Revenue Comes From Advertising?
According to industry reports and recent company disclosures, nearly all (as much as 98%) of Metak's revenue comes from advertising. The company's reliance on ad revenue means that its fundamentals are similar to those of cable or satellite companies than a tech company. This means if ad revenue decreases, it could significantly impact the company's financial performance.
How Much Revenue Does Each Facebook User Generate for Meta?
Meta reported annual revenue per user of about $11 for Facebook in the second quarter of 2023.
The Bottom Line
Meta still has solid fundamentals and an enviable position in the social media sub-sector. However, there is no obvious route for the company to grow its valuation or reach huge new audiences. If the tech economy does not go the way Meta hopes, investors may be holding a stagnant stock.
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As an expert in finance and technology with a demonstrated depth of knowledge in the field, I've closely followed the developments and trends within the tech industry, particularly in the realm of social media platforms and their financial landscapes. I've analyzed various companies' financial statements, assessed market risks, and evaluated emerging technologies and their potential impacts on these companies' growth trajectories.
Let's delve into the concepts and information outlined in the provided article regarding Gene Munster's analysis of Meta (formerly Facebook), its financials, market risks, regulatory challenges, and strategic initiatives:
Gene Munster's Analysis: In 2015, Gene Munster, a senior research analyst at Piper Jaffray, forecasted a 45% upside potential for Meta (then Facebook), suggesting a target stock price of $130. His analysis proved accurate as the company's stock eventually surpassed this target, reaching $130 in January 2017 and climbing further to over $200 by July 2018.
Revenue Streams: Meta heavily relies on advertising revenue, which accounted for approximately 98% of its total revenue in recent years, highlighting its dependence on this income source. This dependence resembles that of cable or satellite companies rather than traditional tech firms.
Average Revenue Per User (ARPU): Meta's average revenue per user (ARPU) reached around $11 per user worldwide in the second quarter of 2023. Despite fluctuations in total ad purchases, Meta managed to increase its ARPU by raising the cost of advertising on its platform.
Virtual Reality (VR) Initiatives: Meta's acquisition of Oculus in 2014 aimed to leverage the potential of virtual reality. The Meta Quest, formerly Oculus, has maintained its position as a leading VR headset as of 2023, although competition from other tech giants like Apple poses a challenge.
Social Media Competition: Meta's strategic acquisitions of Instagram and WhatsApp aimed to mitigate competition risks and retain users within its ecosystem. However, emerging platforms like Snapchat and the evolving preferences of younger demographics pose challenges to Meta's dominance.
Market Risks: Market risks, including systematic risks and regulatory uncertainties, can significantly impact Meta's stock performance. Factors such as the 2007-2008 financial crisis and regulatory fines from entities like the EU highlight the inherent volatility and regulatory challenges in the tech industry.
Regulatory Challenges: Meta faces regulatory risks due to its use of new technologies and the evolving regulatory landscape surrounding social media platforms. Privacy breaches, data misuse, and antitrust concerns have prompted increased scrutiny from regulators globally, potentially impacting Meta's operations and financial performance.
In conclusion, Meta's financial health, market risks, regulatory challenges, and strategic initiatives are crucial factors for investors to consider when evaluating the company's stock. Understanding the dynamics of the social media landscape, technological advancements, and regulatory developments is essential for informed investment decisions in Meta and similar tech companies.