Meta Platforms: Pause That Refreshes

May 23, 2022 8:17 AM ETMeta Platforms, Inc. (META)AAPL, MSFT, RBLX20 Comments9 Likes

Summary

  • Meta Platforms has paused spending growth to refresh the earnings stream of the business.
  • Metaverse excitement has dimmed, but the Apple mixed reality device should reinvigorate market growth.
  • The stock is insanely cheap at 14x '23 EPS targets while Reality Labs spending continues to constrain short-term profits.
  • Looking for more investing ideas like this one? Get them exclusively at Out Fox The Street. Learn More »

Virtual presentation

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After a period of Meta Platforms (FB) straying away from a business focus on digital advertising, the social media company is now taking a wise step back from a promising Metaverse future. After a period of weakness, good companies rightsize the focus on the business while continuing to invest in the future. My investment thesis is ultra Bullish on the stock with the social media platform solving the Apple (AAPL) privacy headwinds while scaling back from aggressive spending on the Metaverse to drive profits higher.

Spending Pullback

Along with some other high-profile tech companies, Meta Platforms probably surprised the market with the discussion of pulling back on spending. The company reported solid Q1'22 results and the economy isn't necessarily in a recession warranting the massive dip in the stock.

Either way, the social media company announced plans to cut spending for the year. The updated plans are to spend $87 to $92 billion on operating expenses, down $3 billion from the prior goal of $90 to 95 billion.

In the quarter, the Reality Labs segment again lost a massive amount of money cutting the income of the tech giant. The segment only produced $695 million in revenues while losing $3 billion. Note, Meta Platforms only had $8.5 billion in profits during the quarter with the Reality Labs segment cutting the Family of Apps profits by over 25%.

Meta Platforms Segment Results

Source: Meta Platforms Q1'22 earnings release

Despite the solid quarter and the plans to cut operating expenses the rest of the year, analysts have actually started cutting EPS targets again for the year. The current consensus target for the year is down to only $11.77 per share while analysts were forecasting over $14 per share for 2022 back to start the year.

Meta Platforms EPS estimates
Data by YCharts

At a stock price of $194, Meta Platforms is generally cheap with 2023 EPS estimates still above $14. The market is probably over playing expected weakness in the digital ad market while the tech giant appears closer and closer to solving the Apple privacy issues via AI and monetizing short-form videos at a higher clip to overcome the pressure from TikTok.

Don't forget, while the market started focusing on the Metaverse, ARK Invest predicted the digital ad market has years of substantial growth ahead due to a shift in spending from retail space to digital ads. The digital ad market could more than double to $410 billion by 2026 providing a robust growth path for Meta.

Mixed Picture

Ironically, the reality of the Metaverse became more clear last week as Apple took a major step towards the commercial launch of a mixed reality device while the market has a mixed picture on the sector. The tech giant apparently showcased the mixed reality headset to the BoD in one of the final steps to officially launch later this year. Either way, the product isn't likely to go on sale until 2023, but the presence of Apple will bolster the growth in the sector.

Meta Labs plans to launch their Project Cambria high-ed mixed reality device at a similar time point. The Oculus Quest Pro headset is expected to cost $799 and is being described as a "laptop for your face" in a quest by Meta for the device to focus more on work tasks than virtual games.

Citi analysts recently predicted the Metaverse could be worth up to $13 trillion by 2030. The analysts predict a narrow definition of the Metaverse will include up to 1 billion AR/VR device users with a TAM of $1 to $2 trillion.

Meta Platforms TAM

Source: Citi research

Considering Meta Platforms only generated $685 million in revenues from the Reality Labs group in Q1'22, investors should understand the reason CEO Mark Zuckerberg has spent so aggressively on the sector. The combination of Oculus headsets and the Horizon Worlds provide a powerful combination for monetizing these investments over time.

The massive $13 trillion market prediction by Citi includes immersive 3D worlds accessed through smartphones probably similar to playing on Roblox (RBLX) or Minecraft, owned by Microsoft (MSFT).

In no huge surprise, the recent stock market downturn and massive weakness in the tech sector has led to generally less interest in the Metaverse providing for the mixed picture in the current economic environment. A recession tends to cause a dip in investments around new technologies and are likely to cause some customers to pull back from purchasing a mixed reality device costing $800.

Metaverse Interest over time

Source: Google Trends

With Metaverse interest down, Meta is wisely pulling back on some of the runaway spending on the sector. The technology is definitely a part of the future tech world, but the hype is always over done on new promising technologies and some reduced spending by competitors while Apple helps legitimize the AR/VR devices sets up Meta in a strong position.

Takeaway

The key investor takeaway is that Meta Labs is ridiculously valued for the earnings stream of the digital advertising market. The stock only trades at 14x 2023 EPS targets despite currently running a business producing $12 billion in annualized losses, or the equivalent of up to $4 in lost profits.

The Reality Labs division definitely faces a mixed picture in the near term with an Apple product launch legitimizing AR/VR devices while market interest has definitely soured with an economy facing recessionary pressures. Long term, Meta Labs is poised to ride the massive Metaverse wave from investing up front in the business.

Investors should use the weakness to invest in the stock at the lows while the market appears to under estimate the earnings potential of the digital ad business and the boost of reducing aggressive spending.

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Stone Fox Capital Advisors, LLC is a registered investment advisor founded in 2010. Mark Holder graduated from the University of Tulsa with a double major in accounting & finance. Mark has his Series 65 and is also a CPA.


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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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