Meta Stock: Metaverse Becoming A Reality (NASDAQ:META) - Seeking Alpha

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Investment thesis

While the Metaverse accidental is simply a semipermanent 1 for Meta Platforms (NASDAQ:META), I came retired of the Meta Connect 2022 lawsuit much affirmative connected the absorption Reality Labs is taking. I progressively admit that the usage cases for the products and solutions that Reality Labs does adhd worth to consumers' lives. In addition, the continued dense investments into Reality Labs volition accelerate technological advancements that volition bring the institution an added vantage successful the Virtual Reality ("VR"), Mixed Reality ("MR"), Augmented Reality ("AR") and the Metaverse space. In addition, we could spot upside to Reels successful the coming 4th arsenic Meta has ramped up the advertisement loads connected Reels successful the past fewer months arsenic it looks to summation the monetization accidental for Reels.

Enterprise applications for the Metaverse

First, I deliberation that astir who were watching the Meta Connect 2022 lawsuit would person noted that the institution has a caller partnership with Microsoft (MSFT), arsenic we saw Microsoft CEO Nadella accidental that Microsoft volition marque Windows, Office and Teams, arsenic good arsenic different Microsoft programs disposable connected the brand-new Meta Quest Pro arsenic good arsenic the existent Meta Quest 2 virtual world headsets. I deliberation what this means is that with the concern with Microsoft, much investors tin person the assurance that much endeavor users volition follow Meta's level implicit time.

By bringing Teams meetings arsenic good arsenic Windows 365 products to Quest products, this volition bring successful a larger fig of functions connected Quest products and increases their usage cases arsenic Meta works to grow into endeavor applications, and determination is nary amended spouse than Microsoft for that. In addition, Zoom (ZM) volition beryllium integrated into Meta's workplace successful aboriginal 2023, portion 3D models successful Workrooms was besides disclosed successful the event.

From gaming to social, fittingness and education

While the main taxable for the 2022 Meta Connect lawsuit was endeavor applications, I deliberation that I started to spot much usage cases extracurricular of the accepted gaming usage cases for Quest products.

Gaming remains 1 of the main uses for Quest products and I deliberation that it is encouraging to spot that apical games similar The Walking Dead: Saints & Sinners person exceeded $50 million successful income connected Quest alone. On apical of that, we volition beryllium seeing astir 5 caller launches for the remainder of 2022 and 2023. With the caller merchandise of contented arsenic good arsenic much verticals, I americium of the presumption that Quest volition bring successful a wide assortment of gaming audience. In addition, determination are respective tools listed successful the apical class of the Quest store that pertain to societal applications similar VR chat, YouTube VR, for example. As much Quest users statesman to commencement utilizing these societal applications, I deliberation that arsenic the societal applications commencement to summation traction, we could spot much caller Quest users travel distant arsenic a web builds.

In addition, we are seeing much fittingness usage cases similar the Quest Companion App, arsenic good arsenic the integration of the iPhone wellness app. This looks to beryllium the opening of different wellness usage cases to look arsenic much applications commencement emerging connected the Quest store.

Lastly, partners person been joining the ecosystem with companies similar Accenture (ACN), Unity (U), and Coursera (COUR). Accenture has really already deployed much than 60,000 Meta Quest 2 headsets and onboarded 150,000 employees utilizing the level arsenic an acquisition contented layer.

New Quest Pro

Meta released its brand-new Quest Pro VR/Mixed Reality ("MR") headsets, selling astatine $1,500 per set. Quest Pro is the archetypal of a caller enactment of much precocious headsets that person MR features that tin assistance with improving workplace applications. According to Meta:

Meta Quest Pro is the archetypal introduction successful our caller high-end enactment of devices, and it's packed with innovative features similar high-res sensors for robust mixed world experiences, crisp LCD displays for crisp visuals, a wholly caller and sleeker design, positive oculus tracking and Natural Facial Expressions to assistance your avatar bespeak you much people successful VR.

I deliberation what differentiates Meta's Quest Pro is the next-generation optics arsenic the Quest Pro has mates of caller and large improvements implicit the Quest 2. For one, Quest Pro has an wholly caller optical stack that helps to trim the extent of the optical module by 40%. In addition, the caller Quest Pro is expected to person displays with 75% much contrast, 37% much pixels per inch than the Quest 2. On apical of these improvements, determination is an 50% betterment successful the peripheral portion arsenic good arsenic 1.3 times larger colour gamut than the Quest 2.

The Metaverse revenues volition come

I deliberation that portion the Reality Labs conception is inactive successful its aboriginal days, determination person been encouraging signs of expanding involvement and take-up arsenic good arsenic improvements successful the exertion and level experiences that helps to region the barriers to adoption.

First, we person seen that Quest 2 income was much than 7 times larger than Quest 1. This, successful my view, comes arsenic Quest 2 has importantly improved functionality arsenic good arsenic the improved acceptance of VR globally. The adjacent measurement for Meta is to proceed to amended the acquisition to thrust further adoption.

Second, I americium seeing much monetization opportunities for Meta arsenic it continues to put successful Reality Labs. With much than $1.5 billion having been spent connected the Quest Store's games and apps, this is simply a acold outcry from the anticipation of $200 cardinal successful virtual marketplace worth by 2026 by McCann WorldGroup.

There are presently 33 apps retired of the much than 400 apps connected the Quest Store that generates much than $10 cardinal successful revenue. I deliberation that arsenic Meta brings successful much levers to monetize its business, similar that of the Avatar Store, we could spot Meta motorboat a ample marketplace for integer goods erstwhile that happens.

Continued concern into the Metaverse arsenic a semipermanent opportunity

As we person seen above, the usage cases for Meta's imaginativeness of the Metaverse proceed to turn and the acquisition is progressively becoming much realistic and improved from anterior generations. As the exertion progressive is inactive successful comparatively aboriginal days, I deliberation that we person to beryllium applicable successful the magnitude Meta needs to put successful this semipermanent concern project.

As an example, the institution spent $7.8 cardinal successful 2020 connected Reality Labs, portion the fig astir doubled to $12.5 cardinal successful 2021. While the pacing of summation has decelerated owed to near-term needs to lucifer spending to gross growth, the Metaverse remains successful request for dense investments. As such, I deliberation we volition spot that successful 2022F and 2023F, Meta volition beryllium spending $15.5 cardinal and $19 cardinal respectively to further its plans and proceed to amended connected the exertion and acquisition successful the Metaverse.

While I expect that Meta's concern successful Reality Labs volition proceed to increase, determination are surely near-term challenges similar the announcement to chopped costs by 10% successful the adjacent fewer months, on with hiring freeze, I deliberation that portion Reality Labs is inactive important successful the long-term, determination could beryllium immoderate investments successful the concern that volition beryllium pushed further retired to the aboriginal to guarantee near-term sustainability.

Reels monetization continues to improve

In addition, Reels monetization is expanding arsenic we spot much advertisement loads successful Reels. This volition bring caller advertisement products and bring much monetization opportunities for Reels. According to Citi, their tracking of Instagram Reels advertisement loads reached 14% successful September compared to conscionable 8% successful July, with the archetypal advertisement vulnerability being brought guardant for the mean user.

While I deliberation that Reels monetization is inactive successful its aboriginal days and Instagram Stories lone reached parity aft astir 4 years of operations, immoderate motion that Reels could instrumentality disconnected volition beryllium appreciated by the market.

Despite outgo cutting, Meta intends to proceed to absorption connected not conscionable Reality Labs, but besides connected Reels. As highlighted successful my erstwhile article, Reels already achieved a $1 cardinal tally complaint overmuch faster than Instagram Stories and I deliberation this again suggests the spot of abbreviated signifier videos arsenic a format, arsenic good arsenic that of the Meta radical of platforms.

Valuation

Meta is present trading astatine 10.3x 2023F P/E and 9.2x 2024F P/E. While determination are immoderate risks and uncertainties facing the business, erstwhile looking astatine the institution from 1 twelvemonth ago, I spot that Reels person started to make into thing great, and the accidental for Reality Labs looks precise promising.

As such, I proceed to deliberation that Meta volition spot aggregate enlargement successful the mean word arsenic we look astatine the discount it is trading compared to peers. I presume a 15x P/E aggregate connected my estimates for 2024F EPS, I deduce a people terms of $225 for Meta, implying an upside imaginable of 70% from existent levels.

Key Risks

Global macroeconomic environment

As a effect of worsening planetary macroeconomic conditions, we could spot that the request for planetary advertizing whitethorn shrink. This volition impact Meta adversely fixed the company's dependence connected the planetary advertizing budget.

Competition

While Meta is actively addressing the menace that TikTok brings to the societal media landscape, determination is nary uncertainty a hazard that the actions it takes and the investments it puts into Reels does not materialize into coagulated accretive returns for investors. As the caller procreation of Gen Z subordinate TikTok arsenic the level wherever everybody is at, this whitethorn endanger Meta's quality to effort to tackle contention from TikTok, particularly if Reels does not instrumentality disconnected oregon does not execute arsenic good arsenic expected.

Capital spending requirements for the Metaverse

While the Metaverse appears to beryllium progressively attractive, we request to retrieve that this is much of a longer-term opportunity. As such, absorption needs to marque definite that the superior expenditures spent connected Reality Labs is kept successful cheque and in-line with the existent concern and marketplace conditions.

Conclusion

I utilized to instrumentality a presumption that Meta's Reality Labs is truly conscionable an optionality that could bring an upside successful the agelong term. However, based connected the caller Meta Connect 2022 event, I near the lawsuit becoming much convinced by Mark Zuckerberg and Meta's imaginativeness of the Metaverse. The usage cases volition scope not conscionable from gaming to different segments similar education, enterprises, fittingness and social. In addition, determination are aggregate levers to propulsion to make revenues from the investments and outcomes of Reality Labs. In addition, I thought that it was besides encouraging to spot absorption proceed to summation advertisement loads for Reels and research ways to summation monetization of Reels successful the adjacent term. My people terms of $225 for Meta, implying an upside imaginable of 70% from existent levels.

I americium portfolio manager with acquisition moving for a hedge money and a long-only equity money with much than $1 cardinal successful assets nether management. Focused connected agelong word investing, I judge successful a barroom doorbell strategy successful a portfolio, wherever determination are some maturation and worth elements, which volition beryllium reflected successful my articles. CFA charter holder and graduated with degrees successful Finance and Accounting.