So far, everything connected to the metaverse that Facebook parent Meta Platforms, Inc. (NASDAQ:META) has failed to acquire traction or create the income that the market would have hoped to see. But the good news is that the company generates a considerable amount of cash flow and can use that cash flow to continue rolling out new and intriguing initiatives.
The most recent attempt was made on June 26th, when management announced the release of Meta Quest+. Meta Quest+ is the company’s first subscription service, based on the premise that consumers could be prepared to pay a regular monthly payment for access to specialized gaming content. It is based on the Meta Quest headset, which is now in its third version. This is a significant step forward for the organization. In the short run, it is unlikely to have a significant impact on revenue. However, in the long run, it has the potential to add significant value to the organization and Meta stock.
Meta Quest+ Is Now Available
On June 26th, Meta Platforms’ management stated that, beginning July 1st, users of its Meta Quest 2 and Meta Quest Pro headsets will be able to subscribe to a monthly subscription that will grant them access to two hand picked virtual reality games each month. Pistol Whip and Pixel Ripped 1995 are the first two games available in July. Mothergunship: Forge and Walkabout Mini Golf will be released in August by the firm. Those who sign up before July 31st will receive their first month of service for free. However, after that, the price will be $7.99 per month, or $59.99 per year if purchased in advance.
The corporation has struggled to make considerable success on its metaverse investments thus far. For example, in 2022, its Reality Labs sector, which focuses on all things metaverse, including their Meta Quest headsets, generated $2.16 billion in revenue. Despite this, it posted a $13.72 billion operational deficit. This came after a $10.19 billion loss in 2021. And, more than likely, the corporation will lose money on the segment again this year. These investments, along with the lack of fruit that they have so far produced, caused the company’s stock to drop more than 70% at one point late last year. However, as the market has come to terms with the company’s general health and as the market looks forward to the prospects afforded by AI, shares have staged a stunning rebound.
In my judgment, the introduction of this subscription service will struggle to acquire traction at first. However, if Meta Platforms plays its cards correctly, it has the potential to be a significant revenue generator for the organization in the long run. This is based in part on Meta Platforms’ sheer scale and what the business has accomplished thus far with its virtual reality headsets. Meta Platforms counts 3.81 billion monthly active users throughout its whole family of platforms. 3.02 billion of these people use the service on a daily basis.
Using this massive network, Meta Platforms sold an estimated 20 million virtual reality / augmented reality headsets by October of last year. Although the firm has not published official projections, some sources believe that the number of monthly active users of these headsets will reach 6.37 million in October 2022. That figure is almost definitely higher now, though we have no notion of how much. We do know that Meta Platforms will release the new Meta Quest 3 this fall, with a starting price of $499.99 for the 128-gigabyte edition. This, together with the company’s decision to decrease prices on the older version of the device this fall, could help to fuel future growth.
Despite these rather excellent results, it is also true that the corporation has failed in many ways to make its investments in the virtual and augmented reality markets work. For example, when it comes to its Horizon Worlds platform, the corporation had to dramatically adjust its expectations late last year. Horizon Worlds is a “social universe” that allows users to build and visit different areas to hang out, play games, meet people, and do other things. Following the company’s decision to broaden the experience to all Meta Quest customers in the United States and Canada, growth slowed substantially. According to some sources, just approximately 9% of the worlds developed have had 50 or more visitors. As a result, the company was compelled to lower its forecasts for the number of monthly active customers by the end of 2022 from 500,000 to 280,000.
If Meta Platforms can expand its subscription service to all of the monthly active users currently using the Meta Quest platform, and if they all pay monthly rather than annually, that would amount to approximately $611 million in additional revenue per year, much of which would be extremely high margin. However, with billions of monthly and daily active users throughout the company’s family of apps, it wouldn’t take long for this to become a line of business generating a few billion dollars in high margin income per year. In the table above, you can see some possible scenarios for how the service’s financial picture might appear.
As I mentioned earlier in the paper, I anticipate sluggish acceptance of this subscription. This is because the flexibility to choose any two games per month is the platform’s main selling point. However, it will only have two games to choose from at first. At that rate, it will take many months to establish a major library of information that could appeal to a wide range of people. There is also the possibility that the corporation will approach this from the top down rather than from the bottom up. Prioritizing a fixed number of games each month and hoping that customers hook on is problematic since the corporation is then leading with the goal of generating significant revenue rather than leading with the goal of developing a quality experience that consumers would gravitate toward in mind.
While I applaud the company’s decision to enter the $257.1 billion gaming market, $185.8 billion of which is devoted to social and casual gaming, I believe that a more appropriate approach would have been to follow Microsoft’s (NASDAQ:MSFT) lead with its planned acquisition of Activision Blizzard (NASDAQ:ATVI). Acquisitions are a very popular way for corporations to enter this market and quickly establish themselves as key competitors.
Another example of this method may be found in Activision Blizzard’s 2015 acquisition of King Digital. This transaction cost the business $5.9 billion. Over the last three fiscal years, King Digital’s revenue has increased from $2.16 billion to $2.79 billion, while operating profits have increased from $857 million to $1.12 billion. Activision Blizzard’s properties serve 243 million of the 365 million monthly active players exclusively through King Digital. Instead, Meta Platforms is attempting to build its own gaming operations from the ground up, which means edging out well-established enterprises with captive audiences. Given Meta Platforms’ enormous network, this is likely doable. However, it is the more difficult path to take.
Meta Stock Is Being Reassessed
Late last year, I made an extremely contrarian decision and purchased Meta Platforms stock. After the stock had almost fully bottomed out, I invested a little portion of my wealth. In retrospect, I wish I had put a lot more money into that investment, because it turned out to be one of the most profitable I’ve made in the last year or so. I had nearly doubled my investment in the company by the time I sold out earlier this year. I bought on the assumption that the corporation may shut down its metaverse operations at any time and watch its cash flows surge as a result. The company’s stock was relatively inexpensive, and the company’s core was healthy.
My decision to sell when I did was almost as bad as not putting enough money into the investment. I ended up reducing the firm from a ‘strong buy’ to a ‘buy’ in early February of this year. I ended up selling off my units in the company shortly after that, with the final chunk of shares being sold off on March 10th. Since the publishing of that downgrading piece, shares of the company have increased by 47.5%, while the S&P 500 (SP500) has increased by only 3.6%. When you do the arithmetic, what ended up being a near-triple for me might have been a triple.
I determined that the company is trading at a forward price to operating cash flow multiple of 15.7 and an EV to EBITDA multiple of 15. Using the same numbers as I used in my most recent article valuing the company, but adjusting for the continuous increase in share price, the firm is trading at a forward price to operating cash flow multiple of 15.7 and an EV to EBITDA multiple of 15. This is not a bad price for a slow-growing company that is clearly an industry leader. Other initiatives of the corporation, such as its Meta Verified product, also inspire me.
I believe the company will be successful in its latest venture as well. However, I feel that the road ahead will be a lengthy one that stockholders must endure. In terms of how shares are priced and what this means for the future, I believe the market has yet to adequately account for the value that the firm provides. However, I believe that future rise from here is unlikely to be anywhere near what it has been in recent months.
Bottom Line
Based on the information supplied, I believe Meta Platforms, Inc. is making some interesting movements. If the company can create a healthy and vibrant content ecosystem and use its unparalleled network to distribute both its headsets and subscription services, it could generate many billions of dollars in additional high margin revenue each year in the future. Add to that how Meta Platforms’ shares are valued, and I’m still bullish enough to recommend the firm a “buy.” However, I would argue that if Meta stock rises another 10% to 15%, a further downgrading to “hold” would be justified.
Featured Image: Unsplash
