Meta Platforms (NASDAQ: META) has been spending billions investing in the metaverse. It even changed its name a few years ago to reflect its commitment to next-gen virtual reality. It's not only a costly venture, but it's also a time-consuming one, and there's a big risk that it won't play out as CEO Mark Zuckerberg hopes it might. The company is better off abandoning the metaverse, and investors should hold off on buying the stock until that happens, as even teens aren't that excited by it.
Demand may not be all that strong
Virtual reality may appear to be the hip new thing for young people to be interested in and represent a big growth opportunity, but demand doesn't appear to be there, at least not yet. According to a recent survey from Piper Sandler, just 4% of teens who own a headset use it daily. And only 7% even plan on buying a headset at all.
Meta Platforms reduced the price of its virtual reality headsets recently, but at $429.99 for its lower-end Quest 2 headset, it's still a hefty price. Unless someone is intent on spending a lot of time in the metaverse (e.g., on a daily basis), it might be difficult to justify that big of a purchase. And that's a big problem with the metaverse -- while you might not need a virtual reality headset in all cases, it's definitely a big part of the metaverse experience. So if people aren't interested in buying headsets, they likely aren't going to have serious interest in the metaverse.
In general, metaverse interest has waned since 2021 when it was the big new thing that Meta Platforms (still Facebook at the time) was going to invest heavily into. But according to Alphabet's Google Trends data, interest in the search term "metaverse" has been declining and is now the lowest it has been since news about Meta's investment into the online world first came about.
The company has been spending billions on the metaverse already
While tech companies may have side projects they work on that may or may not pan out, expenses related to those projects are usually relatively modest compared to the rest of the company's operations, and rarely do they involve a separate operating segment. But that's not the case for Meta Platforms -- it has been spending billions on the metaverse to the point that it has been destroying the company's financials.
Reality Labs, which is the company's segment related to the metaverse, reported an operating loss of $13.7 billion last year. And the year before that, the loss was $10.2 billion. The metaverse remains in its early stages, and the business generated a relatively modest $2.2 billion in revenue for Meta last year. The company's Family of Apps division, which includes social media sites Facebook and Instagram, along with messaging services Messenger and WhatsApp, brought in $114.5 billion, and the operating profit on that was $42.7 billion.
The company's profit margin has been falling in recent years as a result of those losses:
META Profit Margin (Annual) data by YCharts.
And while the company still generates billions in free cash flow, that also nosedived last year:
META Free Cash Flow data by YCharts.
Generating less free cash flow means the company will have less money to spend on acquisitions or other investments. While Meta is by no means in trouble, it's a concerning trajectory for investors because the deeper the company gets into the metaverse, the more it may feel compelled to continue spending on what could be a horrible venture for the business.
Investors should ditch Meta until it ditches the metaverse
Meta Platforms had a great business when it was just focused on social media. But adding the metaverse into the mix has created a money pit that may only make the tech stock a worse investment.
While the stock has been doing well recently as the business has been cutting costs and laying off staff to improve its bottom line, those cost reductions are likely to pale in comparison to the spending the company is doing on the metaverse. And until it ditches that risky venture, investors should ditch the stock as there could be more pain ahead for investors if operating losses from Reality Labs continue to mount.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
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