One Thing Meta Should Learn From Amazon: Quit The Metaverse (NASDAQ:META) - Seeking Alpha

Luis Alvarez

Two days aft the disappointing net merchandise marks the day of Mark's bold determination of rebranding Facebook into Meta (NASDAQ:META). However, the earning results reflected that the Metaverse is inactive successful the precise aboriginal stages of its metallic linings. The Reality Labs conception is nary antithetic from a start-up burning cash, but it is supported by Meta's fantabulous equilibrium sheet.

I person a condemnation that Meta requires to standard down oregon adjacent discontinue its Metaverse (Reality Labs) business. Amazon would beryllium a large example. Numerous businesses had Amazon (AMZN) entered and quitted successful little than 5 years. The halfway concern of Meta is inactive dependable and profitable. In bid to reinstate its starring status, the determination is necessary.

A Quick Earnings Review

Meta delivered disappointing net results, which led the banal to plummet an shocking 24.5% connected 27 Oct alone. Below tabled a summary of Meta's net data.

(Above Data Abstracted from Conference Call and Gurufocus)

There are 2 segments that Meta is operating in: "Family of Apps" and "Reality Labs". Reality Labs, the absorption of this article, generates gross from income of user hardware products, bundle and content. Examples see Meta Quest, Facebook Portal and related software.

As Meta further explained:

Reality Labs' augmented and virtual world products assistance radical consciousness connected, anytime, anywhere. Meta Quest lets radical defy region with cutting-edge VR hardware, software, and content. Facebook Portal video calling devices assistance friends and families enactment connected and stock the moments that substance successful meaningful ways.

One of the deteriorating factors that led Meta to specified an appalling effect is Mark Zuckerberg's visionary Metaverse. Revenue successful Reality Labs dropped 3 consecutive quarters to $285mil, astir fractional of a twelvemonth agone ($558mil successful Q3 2021). Sales of Quest 2 were discouraging aft the terms hike. The operating nonaccomplishment of the conception expanded to $3,672mil, representing a 37% summation YoY.

Reality Labs expenses were $4 billion, up 24% owed to progressive hiring activities and R&D expenses. Expenses of this conception are astir fourteen-fold of its income, oregon one-seventh of the company's full revenue, and the absorption expected to escalate further successful 2023 arsenic headcount rose.

A Lesson from Amazon

Meta defines the Metaverse arsenic the adjacent improvement successful societal transportation and the successor to the mobile internet. No doubt, the Metaverse is visionary and whitethorn person an evident prospect. I similar the thought of Metaverse and person been immersed successful the gaming experiences of Sandbox (SAND-USD). But investors dissent connected the company's adventurous move. Shares of Meta plummeted astir 70% aft the announcement connected 28 Oct 2021.

Data by YCharts

As the large antheral Ben Graham wrote successful his iconic publication "The Intelligent Investor":

Obvious imaginable for carnal maturation successful a concern bash not construe into evident profits for investors.

Metaverse whitethorn person large prospects decades ahead, but it is precise overmuch successful uncertainty astir this segment's profitability. Perhaps, Mark Zuckerberg has thing to larn from Amazon successful bid to support Meta's profitability.

Former Japan Microsoft President Naruke Makoto had a book astir the domination of Amazon. He believes 2 reasons that Amazon prevails are the company's beardown currency travel and the quality to marque a decisive determination to unopen down unsuccessful businesses.

Here is simply a agelong database of galore projects wherever Amazon entered but ceased their improvement successful little than 5 years of running.

Naruke Makoto

Who inactive remembers Amazon erstwhile launched a Fire Phone? The merchandise had decent specifications, and tech fans were excited.

However, it turned retired to beryllium a failure owed to its innovative Fire OS (which means incompatibility with different operating systems) and assertive pricing strategy. Sales were highly disappointing contempt the terms cut, arsenic nary 1 bought the Fire Phone. It outgo Amazon astir $170mil of operating loss, and $83mil worthy of Fire Phone went unsold.

Problems Lying Ahead

Something akin was unveiled successful Mark's Metaverse but successful a larger scale.

Meta's Horizon Worlds struggled to pull and clasp users. The level lone has less than 200,000 monthly progressive users, mode little than the company's people of fractional a cardinal by the extremity of 2022. Less than 50 radical visited implicit 90% of the world, and astir lands stay unvisited. There is inactive a marathon if Meta wants to crook it into a level that millions of radical volition usage actively, similar Facebook, Instagram and WhatsApp.

Besides, headsets are not that affordable. Meta raised the terms of the little spec Meta Quest 2 to US$399.99 successful July, portion the recently launched Meta Quest Pro costs US$1499.99, which costs much than a 512GB iPhone 14 Pro Max. Without these VR equipment, you volition beryllium incapable to bask the experiences successful Horizon Worlds. With header ostentation information clinging astatine astir 10%, the nationalist would not amusement large involvement successful purchasing these costly equipment. The effect of the terms hike connected Meta Quest 2 was reflected successful the mediocre top-line results successful the erstwhile quarter. Estimates predicted implicit 10 cardinal headsets were sold, but Meta did not disclose the income number.

In the latest league call, Meta called the Meta Quest Pro a instrumentality to alteration much radical to get their enactment done successful virtual and mixed reality. I judge determination are respective problems that the institution has to tackle earlier making it mainstream:

1. Lack of economies of standard and competition

2. Technological enhancement takes years

3. Ethical issues wrong the virtual world

4. Discomfort from wearing the VR headset

5. Health Concerns

Let's not hide determination was Friendster earlier MySpace earlier Facebook.

Time to Quit

As Mark accentuated successful the league call:

Our extremity is to turn Family of Apps operating income specified that adjacent with our AI infrastructure and Reality Labs investments, we tin inactive meaningfully turn our wide institution operating income successful the agelong term.

Growth successful Family of Apps is attainable but hard to execute nether specified a challenging macro backdrop. However, the improvement is improbable to hitch retired the losses generated from the Reality Lab segment, which is accountable for astir $3.7 cardinal and is connected an upward trend. So, Mark's extremity is highly unattainable.

Meta's Earnings Presentation

It is clip to discontinue to support the hard enactment implicit the past decade.

Conclusion

The halfway concern of Meta is inactive dependable and profitable contempt the challenges from TikTok and the gloomy economical environment. After plummeting astir 70% since the banal ticker changed to Meta, the company's valuation is good beneath the humanities level.

Forward PE ratio, Price/FCF, and EV/EBITDA are fractional its 5-year average. I judge the Street has priced successful Meta's conflict to support profitability and currency travel owed to the accelerated enlargement of the Reality Lab segment.

If Meta scales down oregon quits its Metaverse business, the institution volition beryllium a bargain with this charismatic valuation. But for now, we volition hold and spot however things develop.

I person a inheritance moving successful the architectural field. I americium funny successful studying the fundamentals of companies, particularly those with innovations and providing insights into our regular lives.