3 Facts You Must Know About Meta Platforms Before Buying the Stock

Meta Platforms (NASDAQ: META) is one of the world's leading technology businesses that has come to dominate the internet-era landscape. The company has done a wonderful job taking care of its shareholders, with the stock rising 672% in the past 10 years.

You might be wondering if Meta should be in your portfolio. Here are three facts you must know about this leading social media stock investors need to know before they consider buying.

Digital advertising giant

Everyone knows Meta as the business that owns and operates some of the most popular social media platforms on the planet. But it's worth pointing out that the company generates virtually all of its revenue from digital advertising -- 98% in Q3 to be exact. The remainder comes from the WhatsApp Business Platform and the Reality Labs division, both of which will likely remain tiny for the foreseeable future.

Meta has about 21% market share in the U.S. digital advertising industry, second only to Alphabet and ahead of Amazon. Meta's impressive engagement, with the average Facebook, WhatsApp, and Instagram user spending more than 30 minutes per day on the platform, makes it a gold mine for advertisers to target.

Even though Meta did more than $41 billion in revenue last quarter, it's finding ways to continue improving its monetization. Ad impressions were up 7%, with the average pricing per ad rising 11% in Q3 on a year-over-year basis. And given that the global digital ad market is forecast to grow at 15.5% per year on average through the end of this decade, Meta's expansionary days aren't over.

Meta's network effects

Investors who intend to own businesses for many years should make sure there is an identifiable economic moat. This is what helps a company defend itself against competitors and new entrants. Meta arguably possesses one of the world's most powerful competitive advantages thanks to its network effects.

As of Sept. 30, there were 3.29 billion daily active users combined between Facebook, Instagram, WhatsApp, Messenger, and Threads. This massive user base makes the services so valuable to existing and new users because there is so much content being created and because there are so many people to make connections with.

Compare this to a social media app that only has 10 people on it. This would almost certainly serve no purpose to users. Meta's scale clearly demonstrates just how difficult it would be for a competitor to scale up to its size. Consequently, I don't think Meta is under any material threat of being disrupted.

AI is expensive

When OpenAI's ChatGPT was released in late 2022, it kicked off the AI wars. Investors tried to figure out ways to gain exposure in their portfolios to this new technological trend. And for executives, especially those running tech companies, there was an immediate focus on trying to understand how AI could be used to bolster their existing competitive positions.

Meta is already shaping up to be a leader when it comes to AI. The management team plans to spend up to $40 billion this year on capital expenditures, with that figure rising meaningfully in 2025 to bolster the tech infrastructure to power Meta's AI ambitions.

As I mentioned earlier, Meta already has a gargantuan user base that represents 40% of the world population, giving it unrivaled distribution when launching new features. The company already provides AI services to users, allowing them to search for info or create images. More than 500 million people are actively using Meta AI.

And there are over 1 million advertisers using Meta's generative AI tools to better target their customers.

However, investors might be worried that all of these AI initiatives are extremely expensive, with no clear line of sight into what or when the payoff will be. Time will tell if these massive investments are worth it in the form of much higher revenue and earnings down the road.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.