The Big Risks of Investing in Facebook (Meta) Stock

In June 2015, Gene Munster, a senior analysis analyst at Piper Jaffray, argued that Fb Inc. (now Meta) had a forty five% upside potential. The tech firm was then buying and selling simply above $90, that means Munster thought the inventory may get as excessive as $130. He was proper—ultimately. FB reached $130 in January 2017 after which saved climbing, topping $200 in July 2018. It hit the brakes instantly after that when the corporate launched earnings that included a disappointing outlook for future development.

That needed to occur in the end. In 2018, Fb had about 2.3 billion customers worldwide. That’s nearly a 3rd of the world’s inhabitants, and greater than half of those that have web entry. It’s a powerful determine, however there’s a level of saturation. Finally, Fb will cease including customers and customers will cease growing the time they spend on its websites.

There are different challenges that might not presumably have been anticipated in 2015. The most important amongst them in 2018 was the firestorm attributable to the persevering with revelations that Fb and different social media websites are the first platforms utilized by international political operators to unfold false info in hopes of swaying the opinions and votes of thousands and thousands of Individuals.

Let’s look at among the dangers that exist for traders desirous about Meta and Fb, its best-known operation.

Key Takeaways

  • Fb (Meta) is likely one of the world’s most recognizable web manufacturers with billions of customers worldwide.
  • Fb’s advert income accounts for round 98% of its income in recent times, making the corporate closely depending on this supply of revenue.
  • Apart from a drop in promoting, Fb faces potential dangers from regulators, consumer backlash, and elevated competitors within the social media area.
  • There’s additionally a threat that Fb will attain a saturation level when it comes to consumer development and have problem sustaining consumer engagement.
  • Digital actuality the “metaverse,” and synthetic intelligence are areas of potential development for the corporate, however their success is unsure.

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The variety of minutes per day that, in 2015, Fb (now Meta) CEO Mark Zuckerberg claimed that individuals have been spending on common on Fb, Messenger, and Instagram (which FB acquired in 2012). It was as much as 68 minutes in 2018, in line with Statista.com. 

Dependence on Advert Income

In response to the corporate’s monetary statements in 2015, Fb (now Meta) acquired roughly 90% of its income from promoting. That determine had grown to 98% by 2017, in line with Statista.com. To place this in perspective, Apple, Inc. has been making an attempt desperately to introduce income streams exterior of the iPhone, and Fb is way extra reliant on promoting than Apple is on the iPhone.

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Since Fb is so reliant on advert income, its fundamentals usually are not that completely different from cable or satellite tv for pc companies. Apply just a few telecommunications metrics and a humorous sample emerges. The corporate’s common income per consumer (ARPU) in Q2 2015 elevated by nearly 1 / 4 at 23%, regardless of complete advert purchases declining by greater than half at 55%. That is potential solely as a result of the price of promoting on Fb rose by 219%. Ostensibly, this implies some advert customers are getting implausible outcomes on Fb however most usually are not, and this solely additional concentrates the corporate’s lack of income diversification. As of Q2 of 2022, ARPU had reached roughly $10 per consumer, worldwide.

Promoting has been excellent to FB to this point, however an organization counting on one income supply isn’t any completely different from an investor counting on one actually robust safety. It’s higher, or at the least much less dangerous, if the corporate has a diversified cash stream in case promoting {dollars} dip.

Digital Actuality Unrealized

Seemingly each tech big has been throwing critical cash at digital actuality.

Meta’s buy of Oculus, which went for a reported $2 billion, could develop into a winner. Or not. Oculus tops a listing of probably the most promising digital actuality initiatives of 2017, in line with Datamation. The next two are Google and Microsoft. As of late 2018, all are making progress in growing video games and sensible functions utilizing digital actuality, however no clear winner may be declared.

Social Media Competitors

Meta has proven a propensity to imitate or purchase out opponents. In 2012, the corporate spent $1 billion on Instagram. It made a far much less profitable buy in 2014, shopping for the little-known WhatsApp for $19 billion. These buys made strategic sense. These apps may have drawn customers away from Fb.

Within the tech sector, nevertheless, rival apps come thick and quick. Meta can not purchase all of them, and considered one of them may catch fireplace. That is illustrated by Snapchat, an organization Meta tried and failed to purchase for $3 billion. As of 2018, Snapchat had 188 million customers, however that was down a bit from its peak of 191 million and its inventory bought hit badly for the loss.

It’s arduous to think about Fb going the way in which of MySpace, the once-dominant social web site that’s now a footnote in Web historical past. Fb’s 1.97 billion consumer base as of Q2 2022 dwarfs the MySpace peak of 75 million, and Fb has a lot better money circulate, producing $4.45 billion in free money flows.

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However MySpace illustrates how shortly client tastes change. Fb is getting into its second era of customers—and youthful Individuals use Snapchat and Twitter as continuously as they use Fb. Google and Apple, two gamers with longer monitor information, are difficult Fb within the app set up market, too.

Market Dangers

After all, the most important threat to any inventory might be systematic, not particular. There’s not a lot any firm may have completed within the buildup to the 2007-2008 inventory market crash, particularly one tied to housing or finance. The Nasdaq misplaced greater than 75% of its worth through the dot-com disaster, and it’s troublesome to foretell if or when one other free fall is coming.

Regulatory Danger

There’s additionally the prospect of regulatory threat. Fb makes use of what remains to be a comparatively new know-how, and social media is a comparatively unregulated market. Since American industries are likely to turn out to be extra regulated over time, it appears doubtless Uncle Sam will more and more have his fingerprints on social media firms. Ballot any investor and ask if rules are good or unhealthy and the likeliest response is “unhealthy.”

And that’s the place the political firestorm over misuse of Fb by political operators enters the image. Fb, by chance or on objective, allowed the political information agency Cambridge Analytica to reap the information of thousands and thousands of its customers, and that information made its manner into the fingers of international political operators throughout the 2016 U.S. elections. A technique or one other, political operators used Fb and different social media platforms to unfold false info all through the election season. Meta is addressing these issues, however the authorities could resolve it needs to as effectively.

In early 2023, European regulators fined Meta $414 million after it was found that the corporate had illegally compelled customers to just accept personalised advertisements. The penalty carries vital implications for the social media big’s promoting companies (Fb and Instagram) within the EU, a key market. The 27-nation bloc handed a landmark information privateness legislation in 2018 with a purpose to restrict the power of Fb and different firms to gather consumer information with out consent. This legislation has been discovered to have been violated by Fb’s prolonged phrases of service, which successfully power customers to both settle for information assortment or cease utilizing the companies.

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What are the primary dangers going through Meta/Fb?

A number of the dangers to investing in Fb’s inventory embody the corporate’s dependence on advert income, uncertainty surrounding the success of its digital actuality merchandise and its foray into synthetic intelligence, potential for presidency regulation, risk of competitors from newer social media platforms, and potential backlash from customers or advertisers over controversial content material or information privateness points.

How a lot of Fb’s income comes from promoting?

In response to trade studies and up to date firm disclosures, almost all (as a lot as 98%) of Fb’s income comes from promoting. Fb’s reliance on advert income implies that its fundamentals are just like these of cable or satellite tv for pc firms than a tech firm. Which means if advert income decreases, it may considerably influence the corporate’s monetary efficiency.

How a lot income does every Fb consumer generate for Meta?

Meta reported Fb and Messenger’s annual income per consumer (ARPU) as $40.96 for 2021. In different phrases, it earned $40.96 per consumer in 2021. Additionally reported was Fb’s each day lively customers (DAU), roughly 1.93 billion as of December 31, 2021.

The Backside Line

Meta’s reliance on advert income, potential for presidency regulation, risk of competitors from newer social media platforms, and potential backlash over controversial content material or information privateness points are all dangers for traders within the firm. Moreover, the corporate could attain a saturation level when it comes to consumer development and have problem sustaining consumer engagement. These dangers needs to be thought-about by potential traders in Fb’s inventory. If the financial system suffers or if funding dries up for brand spanking new startup applied sciences, the ceiling for FB will nearly actually take successful. Meta has mimicked the Google mannequin of aggressive integration, however that technique is determined by an lively know-how sector with new methods to achieve or add worth to customers.

Meta nonetheless has strong fundamentals and an enviable place within the social media sub-sector. Nonetheless, there is no such thing as a apparent route for the corporate to develop its valuation or attain large new audiences. If the tech financial system doesn’t go the way in which Meta hopes, traders could also be holding a stagnant inventory.


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