Meta Stock Analysis: Metaverse Do Nothing

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TLDR for Meta stock analysis:

  1. The transformation from social media to the metaverse is still far away.
  2. Apple’s privacy policy or even followed by Google will not slash Meta earning capabilities, it just slows the growth.
  3. Meta’s strong balance sheet will help a lot in the transformation into a meta-universe.
  4. The buyback program gives us a glimpse of the management in shareholder shoes.
  5. Even though Meta has an outstanding competitive edge, when it can’t be monetized, it is useless. In the metaverse case, the situation is worse. Meta has no sustainable competitive advantages. Not Yet.

Q: Facebook has transformed itself from social media apps into a virtual reality platform. What does it mean? How does it affect financial performance?
A: Honestly, No. The move from Facebook to Meta does nothing with finances. At least, not yet.

The financial figure, management, and competitive advantage are things that matter most for the investors. Those three serve as the basis for our analysis, not news or talk. According to the Meta Annual report for Full Year 2021 and Financial Report Q1 2022, The Family of apps is still the most significant contributor.

The “family” apps that consist of What’s App, Facebook, and Instagram contribute more than 27 Billion, or about 96% of Meta revenue. While the reality labs – the segment that is planned to be the next big thing for the company – contribute only 2.4%.

So, what actually does the transformation do? Nothing. Not now.

It’s just marketing talk.

Meta stock analysis based on segment contribution
Figure 1: Meta segment contribution Q1 2022. Reality Labs has no significant contribution here.

  1. Even though we didn’t notice the importance of the “metaverse” segment, we still appreciate how the segment contribution rise from 2% in Q1 2021 to 2.5% in Q2 2022. We need to watch this trend carefully.
  2. What is metaverse? To make it simpler, the metaverse is like you playing an online game with a more physical experience. As you can walk through the terrain and street in open-world online gaming, and make transaction and conversation, metaverse offer a similar experience with a more physical presence by hardware assistant.

Q: Meta Stock Analysis should incorporate how Apple iOS 14.5 privacy policy affects earnings. Any comment?
A: It has not yet materialized in FY 2021. We believe it could affect company earnings in the long run. But it is not that bad.

Dave Wehner – CFO of Meta – said that the step taken by Apple will negatively affect company earnings by about 10 Billion. But in Q1 2022, Facebook’s revenue from ads is still strong and still growing. It reaches almost 27 Billion in Q1 2022, slightly larger than the Q1 2021 number of 25.4 Billion. Maybe Wehner is too worried?

In our opinion, it is better to wait for FY 2022 to see the whole effect. Also, we need to calculate if Google follows the same path as Apple for its Android. One sure thing is, that the privacy policy – even if it doesn’t slash Meta revenue – will dampen the growth.

It is not that bad – but not good either.

  1. Meta’s business model is exploiting its family of apps: Facebook, Instagram, and What’s app. Users could use those three at free cost. Meta makes money by offering a space for ads for third parties. Meta also develop AI that could make the ads relevant and match with the user.
  2. The reality Labs simply consist of software and hardware that build Virtual Reality and Augmented Reality, including Quest, and Oculus. This segment’s focus is to present a more realistic virtual experience.

Please read:

Q: What Q1 2022 Financial Report tell us?
A: No dividend, stock buyback program, no debt. All of that still impressed us.

Meta – as formerly known as Facebook – is one of a few exceptional companies that have no debt. For years, Meta fuel its growth using its internal resources without issuing debt. And this trend still continues – even when Apple’s privacy policy hit the core business. With 14 Billion cash in hand, we think meta is ready for its next bet – the virtual and augmented reality.

Another good point from the financial report Q1 2022 is the Cash Flow is still strong. It generated 14 Billion, a rise from the Q1 2021 figure of 12 Billion. Management also still continues a share buyback program of 9.5 Billion.

The financial report – even doesn’t show promising things from Metaverse – gives the company a fine outlook.

Q: Back to Metaverse, could the company transform itself from social media to a metaverse platform? Like Nvidia that transformed from Graphic card-maker to GPU platform?
A: We need to talk a little in detail before making a complete meta stock analysis.

Nvidia enjoys a tremendous demand as a catalyst. When everything takes place in the cloud, executed by AI and machine learning, Nvidia is there with its GPU. There is a demand, there is an urgency.

We don’t see it in Meta. No urgency to move to metaverse or virtual reality. As the pandemic is over, the need for online meetings is diminished. There is no need to enhance the virtual experience with more virtual reality since today we can meet physically. The Mera and Jack Sparrow take place in reality – not virtual. So, the catalyst won’t strong as in the Nvidia case, and we estimate that social media still become the largest contributor to company revenue.

Also, Meta itself has no edge here. We mean that the network effect that serves as a sustainable competitive advantage for the Social media segment can’t be expanded in the metaverse. Make things more complicated. The more likely outcome is Meta uses its cash and dry powder to acquire one or two companies that could boost Meta’s presence in the metaverse.

Shortly speaking, Meta’s competitive advantage is questionable here.

We believe that to conquer metaverse as a management branding effort, Meta needs to acquire some promising start-ups or companies. And it can be done since Meta has a strong balance sheet.

Q: So, the conclusion of this Meta stock analysis is?
A: Meta needs to work a lot on metaverse to make it happen. It is a new wave of technology, like the internet, like social media. If Meta could make it, it will be a Facebook 2.0.

We encourage investors to make decisions with precautions. It is safe to assume that Meta has no advantage in the metaverse, so you need to calculate and make decisions based on Meta’s performance in social media. Think metaverse like a bonus, do not count on it if you have the interest to invest in meta.