3 things about meta platforms that savvy investors know | The Motley Fool

It was a terrible year for Metaplatforms (META -4.89%), with shares having fallen more than 70% since the start of the year. The social media company lost $660 billion in value, roughly equivalent to Warren Buffett’s total market capitalization. Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B).

So, with Meta reeling from another lousy earnings report, is it time for investors to buy or sell? Let’s review three things smart investors know about Meta for answers.

1. Building the metaverse is (too?) expensive

It’s clear that Meta CEO Mark Zuckerberg has staked everything on the Metaverse. He has given presentations on the Metaverse and he has spent over $36 billion on research and development (R&D) on the Metaverse. Zuckerberg even changed the company name from Facebook to Meta Platforms to better reflect his vision.

However, it seems that some investors have not really to believe Zuckerberg had gone all-in – until this year. As Metaverse bills come due, Meta’s stock price has plummeted.

META research and development expenditure data (% of quarterly revenue) by YCharts.

As you can see above, Meta’s R&D costs (as a percentage of revenue) have skyrocketed in 2022, rising from a three-year average of around 23% to 33% in the last quarter ( three months ending September 30, 2022).

2. R&D spending eats away at Meta’s profitability and free cash flow

So far, the high costs of realizing Zuckerberg’s dream seemed tolerable for many investors — a worthwhile investment that could pay off at some point.

However, recent Meta results paint a different picture. Meta’s overall fundamentals have deteriorated. Lower overall ad spend and competition from TikTok are hurting core businesses of Facebook and Instagram. Meanwhile, huge R&D spending by the Reality Labs unit is dragging down Meta’s net profit, operating margin and free cash flow. In less than a year, Meta’s free cash flow plummeted from $12.8 billion to just $317 million, its lowest level in more than a decade.

META data by YCharts.

3. Buying shares of Meta is trusting Mark Zuckerberg

Unlike many public companies, Meta has a two-tier shareholding structure, meaning one person can (and does) own the majority of the voting shares. And that person is Mark Zuckerberg.

Even though Zuckerberg only owns about 13% of the common stock, he owns more than 57% of the voting stock. Therefore, Zuckerberg can ultimately run Meta as he wishes; there is no clear way for shareholders to oust him from his role as CEO.

Outside investors may want Zuckerberg to rein in his metaverse spending — indeed, some have already gone public with their concerns. But, in the end, Zuckerberg doesn’t have to listen.

So, if you’re thinking of buying Meta after its latest drop, here’s something to consider: owning shares of Meta really means placing a bet on Mark Zuckerberg and his leadership. It’s clear that he thinks the best days of the company’s core businesses (i.e. Facebook and Instagram) are behind him, and he has his sights set on a new vision, which is far from generating profits.

With so many other tech stocks trading at historically cheap valuations and the overall economy looking fragile at best, Meta Platforms is not a stock I want to own right now.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jake Lerch has no position in the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Meta Platforms, Inc. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.