Meta Platforms Stock: Microsoft Partnership & New VR/AR Device

Thesis

On October 11th, Meta Platforms (NASDAQ:META) hosted its annual Developer Connect event and the company announced some truly exciting product innovations, as well as partnerships: From a product perspective, clearly most notable is the new VR/AR headset Oculus Pro. The most exciting partnership is, in my opinion, an extensive collaboration with Microsoft (MSFT).

Reflecting on Meta Platform’s exciting updates, I am highly confident in the company’s prospects of building the metaverse. But doubters will keep on doubting (however, I wonder how many of them have streamed the Developer Connect event). Meta shares were down some 3.9% the trading day of the Developer Connect event, and shares have lost almost 65% from all-time-highs.

But in Meta’s context, ridiculously prices are not an instruction, but merely an opportunity. Strong Buy.

New VR/AR Headset: Oculus Pro

As I have highlighted in an article a few weeks ago, Meta’s new VR headset was expected to be introduced at the company’s annual Developer Connect event. And Mark Zuckerberg did indeed deliver: he presented an exciting new iteration of the Oculus Quest VR headset — the Quest Pro.

The Meta Quest Pro is defined as the ‘highest-end VR device’ for (virtual)‘collaboration and creation. As compared to the Quest 2, one of the most exciting Quest Pro updates includes face- and eye-tracking, which is designed to replicate a person’s facial expressions in order to humanize avatars. In addition, in an effort for better hand tracking, Meta also delivered improved touch controllers with embedded sensors. The new headset also contains a customized Qualcomm (QCOM) Snapdragon computer chip for significantly improved graphics and connectivity.

Mark Zuckerberg commented:

It’s work-focused. The ideal customers for this are gonna be either people who just want the highest-end VR device — so enthusiasts, prosumer type folks — or people who are trying to get work done.

Zuckerberg also said that: (emphasis added)

Basically, this is a step toward all 200 million of those people who get new PCs every year starting to instead do some of the work in VR.

The new VR headset will cost as much as $1,499, which is about $1,000 more than what the previous ‘entry-level’ headset costs — and should likely push better operating profitability at the loss-making Reality Labs segment. For reference, it is estimated that the Meta Quest 2 headset has so far sold approximately 15 million units. A similar number for the Quest Pro would imply about $22.5 billion of revenues.

The Quest Pro will be available for sale immediately (pre-order) and will be shipped to customers on October 25th.

Partnership With Microsoft

Commenting on Mark Zuckerberg’s metaverse ambition, the initiative has often been described as delusional and a low-probability long-shot bet. But following a very close partnership with Microsoft, is Microsoft also delusional? Respectively, would you bet against Microsoft?

In joint announcement, Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella said that they were collaborating building the metaverse. There are two major dimensions of collaboration to consider.

First, there is gaming. Arguably, gaming has started the metaverse hype — and Microsoft’s $68.7 billion acquisition of Activision Blizzard (ATVI) has kindled the fire. And on 11th October, Microsoft and Meta announced that they are jointly

… exploring ways to bring Xbox Cloud Gaming to Meta Quest Store, allowing gamers to stream hundreds of high-quality Xbox games to phones, tablets, PCs, select smart TVs, and the Meta Quest platform.

Second, there is ‘the future of work’. In a press release (linked previously), Microsoft said that the company expects in the ‘not so distant future’ the metaverse will be a one of the most popular medium to connect. The software tech giant estimates that in the next two years, approximately 50% of Gen Z and millennials will do some work in the metaverse. And accordingly, the partnership with Meta should enable that

… Microsoft 365 apps will be available on Meta Quest devices, enabling people to interact with content from their favorite productivity apps including Word, Excel, PowerPoint, Outlook, and SharePoint within VR.

In the future, Windows 365 will also be available on Meta Quest devices, with the ability to stream a Windows Cloud PC including your personalized apps, content and settings.

While it remains to be seen how the partnership with Microsoft will progress, and how much revenue potential the collaboration brings for Meta’s Reality Labs, the implications of the part partnership are without a doubt highly positive.

Valuation Remains Attractive

Down some 65% from all-time highs, Meta is now trading at a TTM EV/EBIT valuation of x8.3, which is a 46% discount to the sector. Such a cheap valuation is absolutely not justified. Meta’s balance sheet remains strong and the company’s 24.5% free cash flow margin is one of the highest metrics in the industry (greater than 200% premium).

Moreover, whatever value Meta accumulates will be attributable to equity holders, given that the company is a net-creditor. As of June 30 Meta had $40.7 billion of cash and short term investment, against total debt of only $16.7 billion. Meta’s cash from operations was about $58 billion for the trailing twelve months. Personally, I would accept half the cash flow strength and would still feel excited about investing in Meta (For reference, half the cash flow would imply a x15 P/Cash Flow).

Conclusion

Meta’s Developer Connect event has highlighted how hard, and arguably also how effective, the social media giant is working towards the metaverse. I understand that the speculative nature of investing in the realization of a new business opportunity is not appropriate for every investor. Personally, however, I love Meta’s spirit of innovation and entrepreneurialism. And I am excited to learn more about the Oculus Quest Pro VR/AR headset, as well as Meta’s partnership with Microsoft.

Reflecting on Meta’s financials, valuation and future metaverse prospects, I continue to believe Meta Platforms stock is a ‘Strong Buy’.