Stock Analysis & Ideas

Facebook: Welcome to the Metaverse

It has been quite a week for Facebook (FB). Let’s start with the company’s hotly anticipated third-quarter results. After Snapchat’s (SNAP) disappointing outlook shook the markets, all eyes turned to Facebook.

On October 25, Facebook released mixed Q3 results. While earnings of $3.22 per share beat by $0.05, revenue of $29 billion missed estimates by $510 million. Worth noting, it was the first miss on the top line since Q3 of 2018. I am bullish on the stock. (See Insiders’ Hot Stocks on TipRanks)

Monthly active users (MAU) and daily active users (DAU) which are key industry metrics, came in at 2.9 billion and 1.9 billion, respectively. This was relatively inline with estimates.

Disappointing Outlook

In terms of actual quarterly results, nothing really stood out, but once again it was the cautious outlook that spooked investors. Facebook guided downwards and now expects Q4 revenue to be in the range of $31.5 billion to $34 billion, which was shy of the $34.8 billion analyst average consensus.

The company pointed to headwinds related to Apple’s (AAPL) iOS changes, and continued pandemic pressures as reasons for the downward revision. It was however, the changes to Apple iOS that were the driving factor behind the miss. On the company’s conference call, CFO David Whener said that it was the largest factor in terms of Q3 headwinds.”

CEO Mark Zuckerberg also discussed the negative publicity that the company has been receiving as of late, and went so far as to say it was a “coordinated effort to use leaked documents to paint a false picture of our company.”

Which is a good segway to the most significant news to come out of the company this week – the shift of focus to building a metaverse.

What Is a Metaverse?

It’s important for investors to understand that “metaverse” is not unique to Facebook. It’s a term that originated in the sci-fi novel Snow Crash, penned by Neal Stephenson.

While there is no concrete and accepted definition, “metaverse” is often used to to describe a 3D virtual world which is inhabited by real people through avatars.

According to Facebook, “The ‘metaverse’ is a set of virtual spaces where you can create and explore with other people who aren’t in the same physical space as you.”

The shift from a social media company to the metaverse is actually not that big of a reach. Facebook has one of the largest userbases of any social media company in the world, and it is well positioned to bridge the gap between a concept that up until this point, has mainly been talked about in the crypto and NFT space.

The question is, can Facebook be successful in an industry where decentralization reigns supreme? Other metaverses such as Sandbox and Decentraland have gained traction among the NFT and crypto communities, and these communities have largely been very critical of Facebook’s announcement.

While Facebook claims to be acting in the best interest of the people, it is still very much a corporation that is accountable to its shareholders. Not to mention, it has been plagued by scandals related to the company’s use of data.

Horizon, the company’s platform, will effectively be a centralized metaverse. It’ll be yet another interesting battle between decentralized and centralized, much like crypto and fiat currencies.

Facebook Is now Meta

Taking it a step further, Facebook then announced it was changing its corporate name to Meta and the ticker to MVRS. According to Zuckerberg, “from now on, it’s going to be metaverse first.”

It is an interesting shift in strategy, and one that investors will need to monitor closely. It can either be what propels Facebook into one of the most valuable companies on the planet, or a move that ultimately ends in disaster.

Worth noting, this won’t happen overnight. The metaverse vision is five-plus-year vision and one that will take considerable time. In reality, we are likely 10 to 15 years away from any notable traction in this area.

Until then, Facebook will still be judged on its ability to grow its social media platforms in an environment of uncertainty. Something it has proven to be successful at for years, despite the negative press. Don’t bet against Meta — the metaverse is the future.

Wall Street’s Take

From Wall Street analysts, Facebook earns a Strong Buy analyst consensus based on 29 Buy ratings, six Hold ratings, and only one Sell rating.

The average Facebook price target of $405.59 puts the upside potential at 22.2%.

Disclosure: At the time of publication, Mat Litalien did not have a position in any of the securities mentioned in this article.

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