Meta Stock: Rising from the Ashes (NASDAQ:META) (2023)

introduction

For the past decade, Meta Platforms, Inc. (NASDAQ:META) has been criticized in a variety of areas; the spread of false information, its negative consequences for American democracy and the use of its platformInciting violence abroad are just a few of them. Three months ago, sentiment for META stocks hit bearish all-time highs as fears of an impending recession and growing concerns about the company's huge CapEx in the Metaverse caused the shares to plummet.

While life in a helmet might seem like something out of a sci-fi movie, Mark Zuckerberg believes it will be a reality in a few years. Meta's core business is a cash cow, and I see the Metaverse project as a lunar investment that, if materialized, will see shares return to very high multiples over the next 3-5 years.

In today's review, we examine Meta's endless regulatory hurdles, as well as its strategic moves into the Metaverse space, which have the FTC under scrutiny over antitrust concerns. However, the META outlook appears to have improved and has significant upside potential from current levels.

The metaverse takes place

As with any new technology, players are the first to try it, then regular users who want to use social interaction. Mark Zuckerberg claims that if you strap yourself onto a Peloton bike, you've already entered the Metaverse. Fitness apps like Peloton represent the third tier in the growth of virtual reality as its technology unites people worldwide through physical activity.

Öbut popularThe Meta's Quest 2 VR headset currently on the market is being shipped471kin the third quarter at an average price of429 $. While Meta's Quest 2 is hailed as an industry highlight and estimated by IDC to have sold over 15 million units to date, it pales in comparison to other products in the console, smartphone and PC gaming industries.

Regarding new products, Apple Inc. (AAPL) often prefers to observe the movements of other market participants and then counters with a better product. Thus, the long-awaited Apple is more real than ever and is expected2023. A VR/AR earcup from Sony Group Corporation (SONY) and Apple's involvement is a strong vote of confidence in the Metaverse community, but Meta has the advantage of being the first step. However, 2023 won't be the best year for VR headsets due to tight consumer budgets, but it could lead to more recognition and adoption.

Inside acquisition is a catalyst for growth

has targetawakeningCompletion of Within acquisition on January 31, pending FTC decision. On October 22, 2021,agreed goalto purchase Within for an estimated $400 million, part of a plan to expand its presence in VR fitness. Inside, a software maker that develops apps for VR headsets, has a popular fitness app called Supernatural that's exclusive to Oculus, Meta's VR headset brand. Meta doesn't have a corresponding VR fitness app, but it does have Beat Sabre, a game that leads to some cardio.

Zuckerberg sees fitness apps like Peloton as thatthird sectionin the growth of virtual reality as they use technology to connect people around the world through physical activity. As such, I view the acquisition of Within as another strategic move toward conquering the metaverse, and approval will be agrowth catalystlong term.

As of January 2020, Meta has acquired multiple VR app studios including Ready at Dawn, BigBox VR, Sanzaru Games, Downpour Interactive, Twisted Pixel, and Unit 2 Games. As a result, the FTC's legal challenge to Meta-Within will likely be an uphill battle for the agency. The FTC claims that Beat Saber could easily be turned into a fitness app to compete with Supernatural, and that Meta would have struggled with that if Within hadn't been purchased.

They areaccusationsDamages are difficult to prove in court, lack current precedent to support them and it is an emerging and developing market. The tort theories the FTC relies on to stop deals are new and lack significant legal precedent. Since Meta and Within don't compete directly in the VR fitness app space, the deal doesn't add to the focus.

The FTC claims that Meta's acquisition of Within will likely reduce competition because without the deal, Meta would have developed its own VR fitness app and competed with Within. Whether the evidence supports these claims has yet to be determined due to the extensive redaction in the court documents. However, the claims remain speculative and difficult to prove, largely due to the nascent nature of virtual reality.

A team from the FTCrecommendationagainst filing a lawsuit, reported by Bloomberg, also points to a weak case. The FTC's challenge may fail, but it has a bigger impact on Meta's ambitions. It's a sign that this FTC, beset by previous Facebook purchase authorizations on Instagram and WhatsApp, will seek to thwart the social media giant's efforts to consolidate and dominate the burgeoning world of virtual reality through acquisitions .

If the FTC wins, it blocks completion of the deal pending an internal litigation, called Part 3, before an FTC administrative judge. The judge would ultimately determine whether the deal violated antitrust laws as the hearing proceeded. In this case, the companies would have already announced that they would pull out of the deal because the process would take too long. However, if Meta and Within win in court, they can likely close the deal.

First objectivelydefinitelyto complete the acquisition of Within before the start of the new year. However, in a recent lawsuit, Meta stated that it would delay closing the transaction until January 31, 2023 pending the court's decision on the validity of the transaction.

EU Data Protection Decree

According to a recent WSJ article, EU data protection authoritiesreignsthat Meta does not require users to accept personalized advertising based on their online activities. This judgment may limit the data that Meta can access to sell targeted ads.

On Monday, a council representing all EU data protection authoritiesauthorizeda series of rulings stating that EU data protection law does not allow Meta to use its terms of service to justify allowing personalized and targeted advertising. As Meta's European headquarters are in Ireland, the decision requires Irish authorities to issue public orders and fines in line with their decisions. If the bug persists, it will make it harder for Meta and other platforms (TikTok/Snap) to display targeted ads based on data collected through user behavior on the platform.

While the Advisory Board's decisions will not have an immediate revenue impact as there may be a significant delay in implementation due to potentially lengthy litigation, the worst outcome could significantly impact Meta's promotional practices in Europe.

The impact is unlikely to be material.

Assuming that Meta is required to obtain user consent for data collection and targeted advertising, the ATT/IDFA can be viewed as an indicator of potential consumer consent. Based on current industry data, implementation according to ATT/IDFA and GDPR, theAverageUser acceptance rates were around 25-30%. As the new rules are designed to limit the use and collection of data on the platform, any associated revenue barriers will be incremental in addition to the current ATT/IDFA related impact.

I estimate that the IDFA removal impacted Meta's European ad revenue by approximately $2 billion in FY2022. The decision could have a similar impact on the company's earnings. Europe is the most conservative region when it comes to privacy, but I certainly wouldn't rule out contagion entirely.

Additionally, these recent headwinds bring a return to the issue of regulation and potential negative impacts on meta, which have been conspicuously absent over the past two years. With investor focus increasingly shifting to potential OPEX savings recently, the potential additional costs associated with these new headwinds could dampen confidence in more meaningful OPEX savings over the next 18 months.

CapEx investments have more than doubled since 2020

Meta continues to invest in long-term initiatives. Metas investments have more thanGood nightbetween 2020 and 2022 of US$15 billion for aexpected$32.5 billion. Also goal orientationsuggestsa 9% increase in capital expenditures through mid-2023 as the company continues to upgrade AI infrastructure related to content recognition and display technology. Meta continues to build new data centers but is doubling its AI investments to support:

• Recommendations and content discoveries, particularly related to Reels.
• Rebuilding ad technology capabilities to offset signal loss following Apple's privacy changes.

Meta is switching from its legacy CPU architecture toneuGPU clusters that require further increases in investment in the short term to support the organization's AI efforts over time. This is the2 billion dollarsThe reduction in the cap of Target's 2023 CapEx outlook (now $34 billion to $37 billion) was entirely due to non-AI spending.

Meta's $725 million liquidation reduces risk

Meta accessedCounting$725 million to settle a class action lawsuit (Cambridge Analytica scandal) alleging that the company shared users' personal information with various third parties. JudgeVince Chhabrianow he has to approve the pact, and he's been hard on Meta in the process. Considering the deal covers a massive class of more than 250 million people, $725 million is a relatively low price, equating to less than $3 per person.

Specific factors in this case threatened Meta with billions of dollars. It's a high-profile case, already linked to a $5 billion FTC settlement, and Target could have been awarded $1,000 a year in statutory damages.Personaunder the main argument of the authors. Meta faces a skeptical judge, Vince Chhabria, who is considering imposing sanctions on the company's attorney. The case also involved a massive discovery, and the settlement would allow Meta to prevent CEO Mark Zuckerberg from being ousted.

Management continues to trust the Metaverse

Meta has come under fire lately for its investments in the Metaverse, with many investors skeptical that the company will spend about $10 billion annually on R&D for its Metaverse bet. Management, on the other hand, remains optimistic, with CTO Andrew Bosworth recently in ato poston social media stated that Meta would continue to invest money into developing technologies such as AR/VR and the technologies that allow the Metaverse to run, including eye tracking and graphics processing.

Meta is one of many large companies investing in the Metaverse. alphabet (GUT) (Google), Microsoft (MSFT), Adobe (ADBE) e Snap (PHOTO) are also investing heavily in the space. However, widespread acceptance of the metaverse requires a fundamental paradigm shift that requires people to not only accept the concept of socialization in VR, but also to have a working understanding and trust in the value of next-gen technologies. , such as blockchain and NFT. . .

However, the Metaverse remains a long-term opportunity with aimmenselySIZE The components and hardware elements of the Metaverse value chain are projected to grow at a compound annual growth rate of 43% over the next decade, reaching nearly $300 billion by 2025830 $billion by 2028.

The Metaverse is clearly not being built overnight and there is still some time before companies like Meta can reap the benefits of their early involvement in the sector; with the release ofworld horizonand a Metaverse-enabled VR headset,professional searchIt is clear that the goal the team is trying to achieve is to take innovation to the next level and look for revenue streams to generate a return on invested capital.

final considerations

Meta is under constant regulatory scrutiny and is currently facing severe regulatory headwinds, but there is light at the end of the tunnel. Other major tech players are also entering the Metaverse ecosystem, investing billions of dollars, and while widespread adoption is yet to come, Meta's investments will ultimately pay off in the long run.

author ofInvestigation by Yazou Capital

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