Meta Platforms deep dive

Meta has evolved significantly from its origins as a social networking platform into a technology conglomerate with strategic ambitions.

For investors, understanding Meta's business model is crucial for assessing its long-term growth potential and navigating associated risks.

This report explores Meta's dominant advertising segment, its primary revenue driver, along with its strategic investments in emerging technologies like artificial intelligence (AI), virtual reality (VR), and augmented reality (AR).

Meta is positioning itself as a leader in the AI industry with a strong focus on open-source development. This strategy not only enhances its advertising capabilities through tools like Advantage+ but also lays the groundwork for future revenue streams in e-commerce, customer service, and enterprise solutions.

At the same time, Meta’s substantial investments in VR and AR are integral to its vision of the metaverse, a virtual environment poised to redefine social interaction and digital presence.

Whether your focus is on immediate returns from advertising or the long-term potential of AI and the transformative possibilities of VR and AR, this analysis provides the insights necessary to make informed decisions about Meta's place in your portfolio.

Table of Contents

• Meta’s business segments

• Meta’s business model

• The ad market overview

• Family of Apps

• Reality Labs

• Meta AI

• Safety and security

• Competitive advantage

• Growth opportunities

• Risks

• Financials

Meta’s business segments

Meta’s business model primarily revolves around generating revenue through advertising. However, the company has been in the process of diversifying its revenue streams and business activities over the years. Below are the key components of Meta’s business model:

Advertising

• Core revenue source: The vast majority of Meta's revenue comes from advertising. The company sells ad space on its platforms, including Facebook, Instagram, Messenger, and WhatsApp.

• Targeted advertising: Meta leverages user data to offer highly targeted advertising. This includes demographic information, interests, online behaviour, and interactions across its platforms. The precision of this targeting makes Meta's ad offerings attractive to advertisers looking for a high return on investment.

• Ad formats: Meta offers various ad formats, including display ads, video ads, stories ads, and sponsored posts. These are integrated into users’ feeds, stories, and videos.

Data and analytics

• User data: Meta collects vast amounts of data from its users, which is crucial for its targeted advertising. While the company does not sell user data directly, it uses this data to create more effective advertising products.

• Analytics tools: Meta offers analytics tools to businesses, enabling them to track the effectiveness of their ads and content. These tools help businesses understand their audience better and improve their marketing strategies.

VR and AR

• Oculus and beyond: Meta has invested heavily in VR and AR through its Oculus brand (now Meta Quest). While hardware sales contribute to revenue, Meta’s long-term goal is to create a "metaverse"—a virtual world enabling immersive interactions. This is expected to generate new revenue streams through virtual goods, services, and advertising within the metaverse.

• Software and content: Meta is also developing software and content for VR and AR, which could become another revenue stream, particularly as the metaverse concept evolves.

E-commerce and payments

• Social commerce: Meta has increasingly integrated e-commerce features into its platforms, such as Facebook Shops and Instagram Shopping. These allow businesses to set up virtual storefronts and sell directly to users. It earns a commission on sales made through these platforms.

• Payments: Meta offers payment services through Meta Pay, allowing users to send money and make purchases within the platform. As this service grows, it could become a more significant part of Meta’s revenue.

Subscription and other services

• Workplace: Meta offers a subscription-based service called Workplace, a communication tool designed for businesses. It competes with services like Slack and Microsoft Teams, though its revenue contribution is currently modest compared to advertising.

• Content creator monetisation: Meta has started rolling out monetisation features for content creators on its platforms, such as fan subscriptions, where users can pay for exclusive content. This is part of a broader strategy to retain creators and grow the user base.

Research and development (R&D)

• Innovation and future technologies: Meta invests heavily in R&D, particularly in AI, VR, AR, and other advanced technologies. While these areas currently do not contribute significantly to revenue, they are seen as critical to the company’s future growth and the realisation of the metaverse.

Acquisitions

• Strategic acquisitions: Meta has a history of acquiring companies to bolster its core business and expand into new areas. Notable acquisitions include Instagram, WhatsApp, and Oculus. These acquisitions have allowed it to maintain its dominance in social media, expand its user base, and diversify its offerings.

Meta’s business model

Meta sells advertising on its social media platforms, currently 98% of revenue, most of which comes from Facebook and Instagram.

It competes with other social media and entertainment platforms for user engagement and with alternative marketing channels (digital and traditional) for advertisers' marketing dollars.

It wins users by having a larger existing base (network effect) and better content/features.

It wins advertisers by having more user data for better targeting, and more diverse user demographics, enabling better returns on ad spend (ROAS).

Its growth drivers are:

1. Number of users.

2. Engagement (Time spent per user).

3. Ad frequency (Ad per time spent).

4. Monetization ($ received per ad).

Meta’s advertising value chain

Marketers

As of 2024, Meta had 10mm active advertisers. There are no long-term advertising contracts, and many spend only a fraction of their total advertising budgets on its platforms.

Return on advertising spend (ROAS) guides their budget allocation between different potential platforms and media.

Governments and regulators

Governments can either entirely block Meta’s apps from their country (ex. Russia, $2B revenue loss) or regulate how it operates (ex. how and to what extent it can collect users' data).