After the newly renamed Meta Platforms (FB) posted a massive miss on earnings, driven by heavy investment in money losing metaverse efforts, there is good reason for investors bullish on the metaverse narrative to get nervous.
After all, it is not often that a company of Meta's size sees such a significant single-day decline.
Yet, the issue is far larger. In fact, Meta's inauspicious earnings release, driven in large part by the metaverse that prompted the name change, holds implications for the future of many other firms banking their future on metaverse aims.
The Future for Facebook?
In the very first breakdown of virtual reality initiatives offered to investors, the company's Reality Labs division that heads up this push was shown to be hemorrhaging cash. In fact, the unit lost about $10.2 billion in 2021, with losses accelerating into the current quarter.
While losses in the March quarter came in at $1.8 billion, that ballooned to $3.3 billion by the fourth quarter. That trend does not look as though it is subsiding at all, either.
"We do expect reality labs operating loss to increase meaningfully in 2022, and that's incorporated into our outlook," CFO Dave Wehner told analysts on Wednesday evening's earnings call.
Of course, the idea behind the investment is still quite some ways off, a fact that CEO Mark Zuckerberg noted explicitly in his prepared remarks on the call. For bulls on the metaverse, this long-term view is the crucial factor keeping hopes alive.
"The pandemic has conditioned investors to be more reactionary than usual to short-term results, causing large share price changes during updates," Robert Cantwell, Portfolio Manager at investment management firm Upholdings, told Real Money. "Meta is ramping up investment in unproven technologies (such as the metaverse) during a time their core business is slowing; a recipe for maximizing investor fear."
Nonetheless, Cantwell advised that present fear offers an opportunity. His firm, which holds metaverse-focused stocks like Meta, Roblox (RBLX) , Coinbase (COIN) , and Tencent (TCEHY) as major holdings in its Compound Kings exchange-traded fund (KNGS) , thus sees the current situation as a buying opportunity.
Losing Nerve?
But there is one man who may have less steely nerves in the present situation. Unfortunately for these bulls, that man appears to be the Meta CEO himself, Mark Zuckerberg.
Per Bloomberg, the Facebook front man called an all-hands-on-deck meeting on Thursday to discuss the abysmal earnings release. Teary-eyed, the CEO encouraged his team to focus on short video content to compete with ByteDance's (BDNCE) TikTok, Alphabet's (GOOGL) increasingly successful shorts, and Snapchat (SNAP) .
While slowing numbers in terms of user growth and engagement might indeed encourage a focus on these core business aspects, one has to wonder how capital can be reshuffled if billions per quarter will continue to be lost on metaverse efforts.
For $FB tonight, the most important metric is MAU/DAU growth. Street is looking for up 5%. If the base is growing, the company can power through IDFA and macro headwinds. If engagement declines, FB will need the metaverse to bail them out.
— Gene Munster (@munster_gene) February 2, 2022
The question for investors is one of whether this move to focus on the metaverse is motivated by opportunity or desperation.
Moving Beyond Meta Platforms
To be sure, Meta Platforms is not the only company seeking to capitalize on the much-anticipated metaverse. Indeed, this was illustrated rather swiftly by metaverse-focused video game design software firm Unity Software (U) , which saw its stock surge after reporting stellar earnings in contrast to Meta.
"We believe that the transition from linear 2D to interactive real-time 3D presents a massive growth opportunity for the next decades," Unity CEO John Riccitiello said in a statement after the results. "These are strong tailwinds that help us drive growth for years to come."
He noted that his company is building the foundation of the Metaverse that an increasing number of firms and industries are going to rely upon. In Riccitiello's estimation, his firm will become an important piece to building the metaverse alongside graphics chip giant Nvidia NVDA, The first thing it's going to take to get there was the hardware infrastructure on this planet, handset kingpin Apple (AAPL) , and beyond.
"I have a strong belief that the metaverse is just going to be made from lots of creative people sort of imagining the future forward," he concluded. "These tools are going to be foundational for that."
Elsewhere, analysts remain broadly bullish on names like Roblox, Shopify (SHOP) , and Matterport (MTTR) as many encourage enough room for many firms to succeed.
As metrics like metaverse real estate sales crept over $500 million in 2021 and are projected to eclipse $1 billion in 2022, there is reason yet to believe the overall theme is only beginning to establish itself. This creates plenty of opportunity aside from just Meta Platforms. In short, the metaverse is a forest while Meta Platforms is but a tree.
Exemplifying this, Bernstein analyst Mark Moerdler recently advised clients that many older software firms are being overlooked in favor of flashier, new names on the market.
"While both Adobe ADBE and Salesforce CRM could see upside, it is, we believe, Microsoft MSFT that is best positioned to be a big winner from the metaverse," he wrote in a recent note. "We would argue that Microsoft is extremely well positioned, having almost all of the major capabilities required to deliver a metaverse platform today."
The Redmond, Washington-based firm's acquisition of Activision Blizzard (ATVI) will certainly accelerate this trend as well. Further, its acquisitive action could ignite an arms race to snap up metaverse-focused companies, also rewarding investors eyeing the space at present.
In short, the metaverse is a forest while Meta Platforms is but a tree.
Still, given Meta Platforms unparalleled spend on metaverse buildout, its role as a bellwether remains worth watching, even for investors that avoid the individual stock. In the end, it could portend prescient opportunities or woefully misplaced confidence in paradigmatic shifts.
It appears only time will tell if investments in the virtual world can bring real returns.
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