Meta Stock: The Potential and Pitfalls of Its Reality Labs Bet

Key Points

• Meta Platforms operates two extremely different parts of its business: Family of Apps and Reality Labs.
• The company is losing billions on Reality Labs, betting that the current pain will turn into an incredible long-term gain.
• How is Meta approaching the virtual and augmented reality market, and how big a potential payoff could the company one day see?

Meta Platforms NASDAQ: META is undoubtedly one of the world’s most important technology companies. Due to its position as one of the Magnificent Seven stocks, it is constantly under a microscope.

Interestingly, one part of the company’s business adds massive amounts of value while another part drains it. 

Reality Labs is Meta’s long-term bet on the future of virtual and augmented reality (VR/AR), which lost $18 billion in 2024. 

Below is a look at the long-term potential of Meta’s Reality Labs segment. What type of impact could the ultimate success or failure of this segment have on Meta shares in the long term?

Understanding Meta’s Bold Reality Labs Strategy

First off, it is important to understand why Meta is capable of losing so much money in its Reality Labs segment and why it is allowing this to happen. Meta’s Family of Apps (FoA) segment is arguably the world’s most impressive advertising business. It made around $87 billion in 2024 from this part of its business. Thus, Meta can support losing $18 billion on Reality Labs.

The bigger question is why Meta is willing to incur such significant losses. Ultimately, Meta views VR/AR as the future of human-technology interaction. However, with the technology still in its early stages, development remains costly, yet Meta isn't pricing its VR hardware to fully reflect these expenses. This is clearly demonstrated by the massive price difference between Meta’s Quest 3 and Apple’s NASDAQ: AAPL Vision Pro.

Meta’s cheapest Quest 3 costs $300, but the Apple Vision Pro costs $3,500. Apple is seemingly charging a price at which it can actually make a profit off these devices. Meanwhile, Meta is fine with losing money on these devices to position itself as the product of choice for customers.

The latest available data suggests it is succeeding at this, holding a nearly 71% market share among these devices in Q3 2024. Meta aims to secure market share early so that if VR and AR achieve mass adoption, it can generate significant revenue. Over time, scaling the business will allow the company to drive profitability in the segment.

Key Challenges and Opportunities Facing Meta’s Reality Labs

Starting off with the negatives, Meta’s Reality Labs segment has not grown impressively. Revenues in 2024 are down slightly from 2022. Meanwhile, losses have ballooned by $4 billion. Much of this is due to massive research and development spending for products that are possibly years down the road.

Aside from its hardware, arguably a just as important area of focus for Meta should be its VR/AR application ecosystem. If there aren’t interesting applications for VR/AR users, there is no point in buying the device. Many have made millions in revenue from developing apps.

However, many VR app developers have recently laid off workers. This is happening because the Quest Store is moving away from premium games. Now, free-to-play games are becoming the preferred business model. Overall, Meta says the total payment volume in its VR ecosystem will grow by 12% in 2024.

Moving more toward the positive angle is the potential size of the metaverse. This includes devices, content, creation tools, and more. Meta participates in all these areas and can benefit from them. Two estimates put the size of this potential market between $490 billion and $900 billion by 2030, or $695 billion when taking the average.

Overall, if Meta captured 23% of this market, its Reality Labs revenue in 2030 could be equal to the size of its FoA business in 2024. This doesn’t seem completely unreasonable, given the company’s strong leadership so far. However, what Reality Labs' profitability would look like at that point is very hard to say.

Reality Labs Could Make or Break Meta’s Long-Term Growth

Overall, in a best-case scenario, the investment in Reality Labs could be highly accretive to Meta shares. However, it will likely take several years or more for this to happen if it ever does. If the experiment fails, it will likely have a significantly negative impact on shares.

This may take a long period of time to realize, as markets continually see unimpressive results. Or, investor sentiment could suddenly become deeply pessimistic about Reality Labs, which might hit shares hard in a short period. This area should be a key focus for Meta investors. They should track how the potential for success of the company's massive bet develops over time.