The Big Risks of Investing in Meta Stock (2024)

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.

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.

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.

Market Risks

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.

Regulatory Risk

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.

The Bottom Line

Meta's reliance on ad revenue, potential for government regulation, threat of competition from newer social media platforms, and potential backlash over controversial content or data privacy issues are all risks for investors in the company. Additionally, the company may reach a saturation point in terms of user growth and have difficulty maintaining user engagement. These risks should be considered by potential investors in Facebook's stock. If the economy suffers or if funding dries up for new startup technologies, the ceiling for FB will almost certainly take a hit. Meta has mimicked the Google model of aggressive integration, but that strategy depends on an active technology sector with new ways to reach or add value to consumers.

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.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimerfor more info.