Three Crucial Points to Consider Before Investing in Meta Platforms' Shares
Three Crucial Points to Consider Before Investing in Meta Platforms' Shares
Facebook Inc. (FB 0.05%) is among the world's top tech corporations, leaving an indelible mark on the digital age. The company has showcased commendable shareholder care, with its stock skyrocketing an impressive 672% over the past decade.
You might be pondering whether Facebook should be a part of your investment portfolio. Here are three essential facts about this leading social media company that investors need to consider before making a purchase decision.
Advertising behemoth
Everyone is familiar with Facebook as the entity operating some of the most widely used social media platforms globally. It's noteworthy, though, that the majority of the company's income derives from digital advertising - a staggering 98% in Q3, to be precise. The rest of the revenue comes from the WhatsApp Business Platform and the Reality Labs division, which will likely remain insignificant in the near future.
Facebook boasts an impressive 21% market share in the U.S. digital advertising sector, trailing only behind Google and Amazon. Facebook's robust user engagement, with the typical Facebook, WhatsApp, and Instagram user spending over 30 minutes daily on the platform, makes it a lucrative goldmine for advertisers to tap into.
Despite generating over $41 billion in revenue last quarter, Facebook is continuously finding ways to improve its monetization. There was a 7% increase in ad impressions, followed by an 11% surge in the average pricing per ad in Q3 compared to the previous year. And given that the global digital ad market is projected to expand at a 15.5% annual rate until the end of this decade, Facebook's growth phase seems far from over.
Network advantages
Serious investors should keep an eye out for a business with a discernible competitive advantage, often referred to as an economic moat. This 'moat' helps a company defend itself against competition and new entrants. Facebook, arguably, has one of the world's strongest competitive advantages due to its network effects.
As of October 2022, there were an astounding 3.29 billion daily active users across Facebook, Instagram, WhatsApp, Messenger, and Threads. This substantial user base renders the services highly valuable to both existing and prospective users since it is home to a wealth of content and an abundance of connection opportunities.
Imagine a social media application with just 10 users. This would hardly serve a purpose for users. Facebook's scale clearly indicates the challenges a competitor would face in scaling up to its level. Therefore, I don't foresee any significant threats to Facebook's business model.
AI and its expenses
The release of OpenAI's ChatGPT in late 2022 sparked the AI race. Investors were eager to incorporate this new technological trend into their portfolios, while company executives were scrambling to understand its potential implications for their respective industries.
Facebook is positioning itself to become a player in the AI sphere. The management intends to invest up to $40 billion this year in capital expenditures, with a substantial increase in 2025 to strengthen its tech infrastructure for AI endeavors.
Facebook's existing user base, comprising 40% of the world population, offers unmatched distribution when introducing new features. The company currently provides AI services to its users for searching information or generating images. Over 500 million people utilize Facebook's AI services, while more than 1 million advertisers leverage its generative AI tools for targeted marketing.
However, investors might be wary of the significant costs associated with these AI initiatives, with no clear timeline for returns. Time will tell if these substantial investments will culminate in enhanced revenue and profits down the line.
Given Facebook's AI investments, it's crucial for investors to consider the potential financial implications. With a planned expenditure of up to $40 billion this year and an increased investment in 2025, the company aims to bolster its tech infrastructure for AI. This substantial investment could lead to appreciation in its value as a player in the AI sphere, but it also raises questions about the timeline for returns and potential financial strain.
The company's robust performance in digital advertising, generating over $41 billion in revenue last quarter, makes it an attractive option for investors seeking opportunities in the finance and money markets, particularly in the context of investing.