While the Metaverse opportunity is a long-term opportunity for Meta platforms (Nasdaq:dead), I came out of the Meta Connect 2022 event more positively about the direction Reality Labs is taking. I increasingly appreciate that use cases The products and solutions Reality Labs add value to consumers’ lives. In addition, the ongoing massive investment in Reality Labs will accelerate technological advancements that will bring the company an added advantage in virtual reality (“VR”), mixed reality (“MR”), augmented reality (“AR”) and Metaverse space. Additionally, we can see the upside for Reels in the coming quarter as Meta has been increasing ad loading on Reels in the past few months as it looks to increase monetization opportunities for Reels.
Enterprise Applications for Metaverse
First, I think most of those who have been watching the Meta Connect 2022 event have noticed that the company has a new partnership with Microsoft (MSFT), as we’ve seen Microsoft CEO Nadella say that Microsoft will bring Windows, Office, Teams, as well as other Microsoft software on the all-new Meta Quest Pro in addition to the existing Meta Quest 2 VR headset. I think what that means is that through the partnership With Microsoft, more investors can have confidence that more enterprise users will adopt the Meta platform over time.
By bringing Teams meetings as well as Windows 365 products to Quest products, it will bring more functionality on Quest products and increase their use cases as Meta expands into enterprise applications, and there is no better partner than Microsoft for that. Additionally, enlarge (ZM) at the Meta workplace in early 2023, while 3D models were also revealed in Workroom at the event.
From gaming to social, fitness and education
While the main theme of the 2022 Meta Connect event was enterprise applications, I think I’m starting to see more use cases outside of the traditional gaming use cases for Quest products.
Games remain one of the main uses of Quest products and I think it’s encouraging to see that top games like The Walking Dead: Saints & Sinners are overtaken 50 million dollars In sales on Quest alone. On top of that, we’ll see about 5 new launches for the remainder of 2022 and 2023. With the new release of content as well as more segments, I see that Quest will bring a variety of gaming audiences. In addition, there are many tools included in the top category of Quest Store which are related to social applications such as VR . chatAnd the YouTube VR, for example. As more Quest users start using these social apps, I think as social apps start gaining traction, we can see more new Quest users emerge in the form of a network.
In addition, we are seeing more fitness use cases such as Mission Companion app, as well to merge From the Health app on iPhone. This appears to be the start of other healthy use cases as more apps start appearing on the Quest Store.
Finally, partners have joined the ecosystem with companies like Accenture (ACN), lonliness (yo) and Coursera (COUR). Accenture has already deployed over 60,000 Meta Quest 2 headsets and 150,000 employees using the platform as an educational content layer.
New Quest Pro
Meta has launched its new Quest Pro VR/Mixed Reality (“MR”) headset, which retails for $1,500 per set. Quest Pro is the first of a new line of more advanced headphones with MR features that can help improve workplace applications. according to dead:
The Meta Quest Pro is the first entry in our line of new high-end devices, packed with innovative features such as high-resolution sensors for powerful mixed-realistic experiences, crisp LCD screens for sharp visuals, an all-new, more elegant design, plus eye-tracking and natural facial expressions to help your avatar reflect you better. normal in virtual reality.
I think what sets Meta’s Quest Pro apart is the next generation optics as the Quest Pro has some new and big improvements over the Quest 2. For one, the Quest Pro has an all-new optical stack that helps reduce the depth of the optical module by 40%. In addition, the new Quest Pro is expected to have screens with 75% greater contrast, and 37% more pixels per inch than the Quest 2. On top of these improvements, there is a 50% improvement in the peripheral area as well as 1.3 times the color gamut. Bigger than Quest 2.
Metaverse revenue will come
I think while the Reality Labs division is still in its early days, there have been encouraging signs of increased interest and uptake as well as improvements in technology and platform experiences helping to remove barriers to adoption.
First, we saw that sales of Quest 2 were more than 7 times greater than Quest 1. This comes, in my opinion, because Quest 2 has greatly improved functionality as well as improved global acceptance of VR. The next step for Meta is to continue improving the experience to drive more adoption.
Second, I see more monetization opportunities for Meta as it continues to invest in Reality Labs. with more than $1.5 billion Having been spent on Quest Store games and apps, this is a far cry from the forecast of $200 billion in virtual market value by 2026 by 2026. McCann Worldgroup.
There are currently 33 of the more than 400 apps on the Quest Store that generate over $10 million in revenue. I think as Meta brings more levers to monetize its business, like the Avatar Store business, we can see Meta launch a huge market for digital goods when that happens.
Continuous investment in Metaverse as a long-term opportunity
As seen above, the use cases of Meta Vision for the Metaverse continue to grow and the experience becomes increasingly more realistic and improved than previous generations. Since the technology used is still relatively early days, I think we have to be practical in how much Meta needs to invest in this long-term business venture.
For example, the company spent $7.8 billion in 2020 on Reality Labs, while the number nearly doubled to $12.5 billion in 2021. While the pace of increase has slowed due to near-term needs to match spending with revenue growth, Metaverse still needs into a huge investment. As such, I think we’ll see that in 2022F and 2023F, Meta will spend $15.5 billion and $19 billion respectively to advance its plans and continue improving technology and expertise in the Metaverse.
While I expect Meta’s investment in Reality Labs to continue to increase, there are certainly near-term challenges such as announcing cost cuts by 10% In the next few months, along with the hiring freeze, I believe that while Reality Labs is still important in the long run, there may be some investment in the business that will be pushed into the future to ensure near-term sustainability.
Roller liquefaction continues to improve
Additionally, Reels monetization is increasing as we see more ad uploads in Reels. This will bring in new advertising products and bring more monetization opportunities for Reels. according to CityTheir tracking of Instagram Reels ad uploads reached 14% in September compared to just 8% in July, with initial ads served to the average user.
Although I believe Reels monetization is still in its early days and Instagram Stories only hit parity after nearly 4 years of operations, any sign that Reels can take off will be appreciated by the market.
Despite cutting costs, Meta intends to continue to focus not only on Reality Labs, but also on Reels. As I explained in my previous article, Reels has already had a $1 billion playback rate much faster than Instagram Stories and I think that again points to the power of short videos as a format, as well as the suite of Meta platforms.
Meta is now trading at 10.3x 2023F P/E and 9.2x 2024F P/E. While there are some risks and uncertainties in the business, looking at the company a year ago, I see that Reels is starting to develop into something great, and that Reality opportunity Labs looks very promising.
As such, I still think Meta will see a multiple expansion in the medium term as we look at the discount traded compared to peers. I’m assuming a 15x P/E in my 2024F EPS estimate, and my $225 target derivative for meta, implying a 70% potential for a rally from current levels.
The main risks
global macroeconomic environment
As a result of deteriorating global macroeconomic conditions, we can see that the demand for global advertising may shrink. This will negatively affect Meta due to the company’s reliance on the global advertising budget.
While Meta is actively dealing with the threat TikTok brings to the social media scene, there’s no doubt that the actions it’s taking and the investments you’re making in Reels aren’t materializing in solid cumulative returns for investors. With the new generation of Gen Z Associate TikTok being the platform everyone is on, this could threaten Meta’s ability to try to stand up to competition from TikTok, especially if Reels doesn’t take off or doesn’t work as expected.
Metaverse Capital Expenditure Requirements
While the Metaverse looks increasingly attractive, we have to remember that this is a long-term opportunity. As such, management needs to ensure that the capital expenditures spent on Reality Labs are under scrutiny and are in line with current business and market conditions.
I used to take the view that Meta Reality Labs is really just an option that can bring upside in the long run. However, based on the recent Meta Connect 2022 event, I left the event and became even more convinced of Mark Zuckerberg and Meta’s vision for the Metaverse. Use cases will not only range from gaming to other sectors such as education, organisations, fitness and social. In addition, there are several levers to withdraw to generate revenue from Reality Labs investments and results. In addition, I think it is also encouraging to see management continue to increase ad loads for Reels and to explore ways to increase monetization from Reels in the near term. My target price of $225 is for the meta, which indicates a 70% bullish probability from the current levels.