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Investment thesis
While the Metaverse opportunity is a long-term opportunity for Meta Platforms (NASDAQ: META), I came away from the Meta Connect 2022 event feeling more positive about the direction Reality Labs is headed. I appreciate more and more that use cases for the products and solutions that Reality Labs add value to consumers’ lives. Additionally, continued heavy investments in Reality Labs will accelerate technology advancements that will give the company an added advantage in Virtual Reality (“VR”), Mixed Reality (“MR”), Augmented Reality (“AR”) ) and the metaverse. space. Additionally, we may see an upside for Reels in the next quarter as Meta has increased advertising loads on Reels over the past few months as it seeks to increase monetization opportunities for Reels.
Enterprise applications for the metaverse
First, I think most people watching the Meta Connect 2022 event would have noted that the company has a new partnership with Microsoft (MSFT), because we saw Microsoft CEO Nadella say that Microsoft will make Windows, Office and Teams, plus other Microsoft programs available on the all-new Meta Quest Pro as well as current Meta Quest 2 virtual reality headsets. I think this means that with the partnership with Microsoft, more investors can be confident that more enterprise users will adopt Meta’s platform over time.
Bringing Teams meetings as well as Windows 365 products to Quest products will bring more features to Quest products and increase their use cases as Meta works to expand into enterprise applications, and it there is no better partner for this than Microsoft. Additionally, Zoom (ZM) will be integrated into Meta’s workplace in early 2023, while 3D models in Workrooms were also leaked at the event.
From gaming to social, fitness and education
While the main theme of the Meta Connect 2022 event was enterprise apps, I think I started to see more use cases outside of traditional gaming use cases for Quest products.
Gaming remains one of the primary uses for Quest products and I think it’s encouraging to see that top games like The Walking Dead: Saints & Sinners have surpassed $50 million in sales on Quest alone. On top of that, we will see around 5 new launches for the remainder of 2022 and 2023. With the new content release as well as more verticals, I believe Quest will appeal to a wide variety of gaming audiences. Moreover, there are several tools listed in the top category of the Quest store that relate to social apps like VR chat, YouTube VR, for example. As more and more Quest users start using these social apps, I think as social apps start to gain traction, we might see more and more new Quest users appear as the network is being built.
Additionally, we’re seeing more fitness use cases like the Quest Companion app, as well as iPhone health app integration. This seems to be the start of other health use cases to emerge as more apps start appearing on the Quest store.
Finally, partners have joined the ecosystem with companies like Accenture (ACN), Unity (U) and Coursera (COUR). Accenture has in fact already deployed over 60,000 Meta Quest 2 headsets and onboarded 150,000 employees using the platform as an educational content layer.
New Pro Quest
Meta has released its all-new Quest Pro VR/Mixed Reality (“MR”) headsets, selling for $1,500 a set. Quest Pro is the first in a new line of more advanced headsets with MR features that can help improve workplace applications. According to Meta:
Meta Quest Pro is the first entry in our new line of premium devices, and it comes packed with innovative features like high-resolution sensors for robust mixed reality experiences, crisp LCD displays for crisp visuals, sleek design completely new and sleeker, plus tracking eyes and natural facial expressions to help your avatar reflect you more naturally in VR.
I think what differentiates the Quest Pro from Meta is the next-gen optics, as the Quest Pro has some new and big improvements over the Quest 2. For one, Quest Pro has a whole new stack which helps reduce the depth of the optical module by 40%. Additionally, the new Quest Pro is expected to have screens with 75% more contrast, 37% more pixels per inch than the Quest 2. In addition to these improvements, there is a 50% improvement in the peripheral region as well as 1.3 times wider color gamut than the Quest 2.
Revenue from the Metaverse will come
I think that even though the Reality Labs segment is still in its infancy, there have been encouraging signs of growing interest and adoption as well as improvements in technology and platform experiences that help eliminate barriers to adoption.
First of all we saw that the sales of Quest 2 were more than 7 times that of Quest 1. This in my opinion is because Quest 2 has greatly improved the features as well as the improved acceptance of virtual reality in the world. The next step for Meta is to continue improving the experience to drive adoption.
Second, I see more monetization opportunities for Meta as it continues to invest in Reality Labs. With over $1.5 billion spent on Quest Store games and apps, that’s a far cry from McCann WorldGroup’s expectation of $200 billion in virtual market value by 2026.
There are currently 33 apps out of more than 400 apps on the Quest Store that generate over $10 million in revenue. I think as Meta brings more levers to monetize its business, like that of the Avatar Store, we could see Meta launch a big marketplace for digital goods when that happens.
Continued investment in the Metaverse as a long-term opportunity
As we saw above, the use cases for Meta’s vision of the Metaverse continue to grow, and the experience becomes increasingly realistic and improved over previous generations. As the technology involved is still in its infancy, I think we need to be practical about how much Meta needs to invest in this long-term business venture.
As an example, the company spent $7.8 billion in 2020 on Reality Labs, while that figure nearly doubled to $12.5 billion in 2021. As the pace of increase slowed Due to short-term needs to match expenses with revenue growth, the Metaverse remains in need of heavy investment. As such, I think we’ll see that in 2022F and 2023F Meta will spend $15.5B and $19B respectively to continue its plans and continue to improve the technology and experience in the Metaverse.
While I expect Meta’s investment in Reality Labs to continue to grow, there are certainly short-term challenges like the announcement of a 10% cost reduction over the next few months, as well as a hiring freeze, I believe that while Reality Labs is still important in the long term, there may be investments in the company that are pushed further into the future to ensure near-term sustainability.
Reel monetization continues to improve
Additionally, the monetization of Reels is increasing as we see more ad loads in Reels. This will bring new advertising products and bring more monetization opportunities for Reels. According to Citi, their Instagram Reels ad load tracking reached 14% in September, up from just 8% in July, as initial ad exposure was brought forward for the average user.
While I think Reels monetization is still in its infancy and Instagram Stories only reached parity after almost 4 years of operation, any signs that Reels might take off will be appreciated by the market.
Despite the cost reduction, Meta intends to continue to focus not only on Reality Labs, but also on Reels. As pointed out in my previous post, Reels has already reached a $1 billion run rate much faster than Instagram Stories and I think that again suggests the strength of short videos as a format, as well as the strength of the group. of Meta platforms.
Evaluation
Meta is now trading at 10.3x 2023F P/E and 9.2x 2024F P/E. Although there are risks and uncertainties facing the business, looking back at the business 1 year ago, I see that Reels has started to grow into something big, and the opportunity for Reality Labs seems very promising.
As such, I continue to believe that Meta will see a multiple expansion in the medium term looking at the discount it is trading against its peers. Assuming a P/E multiple of 15x on my estimates for 2024F EPS, I derive a price target of $225 for Meta, implying 70% upside potential from current levels.
Main risks
Global macroeconomic environment
Due to deteriorating global macroeconomic conditions, we may find that global advertising demand may decline. This will negatively affect Meta given the company’s dependence on the global advertising budget.
Competition
As Meta actively tackles the threat TikTok poses to the social media landscape, there is undoubtedly a risk that the actions it takes and the investments it makes in Reels may not materialize into returns. solid accretive assets for investors. As the next generation of Gen Z associates TikTok as the platform where everyone is, this may threaten Meta’s ability to try to compete with TikTok, especially if Reels fails to take off or perform. as well as expected.
Capital expenditure needs for the metaverse
Although the metaverse seems to be getting more and more attractive, we have to remember that it is more of a longer-term opportunity. As such, management must ensure that capital expenditures on Reality Labs are under control and consistent with current business and market conditions.
Conclusion
I used to think that Meta’s Reality Labs is really just an option that might provide long-term benefit. However, based on the recent Meta Connect 2022 event, I left the event becoming more convinced by Mark Zuckerberg and Meta’s vision for the Metaverse. The use cases don’t just range from gaming to other segments like education, business, fitness, and social. Additionally, there are multiple levers to pull to generate income from Reality Labs investments and results. Additionally, I thought it was also encouraging to see management continue to increase ad loads for Reels and explore ways to increase monetization of Reels in the near term. My target price of $225 for Meta, which implies 70% upside potential from current levels.
#Meta #Stock #Metaverse #Reality #NASDAQMETA