The Metaverse has investor heads spinning ahead of earnings, not in a good way

The Metaverse has investor heads spinning ahead of earnings, not in a good way

Earth for Zuckerberg: frustration.

meta pads
Recent announcements of corporate-oriented partnerships to lure major corporations into their metaverse vision are positive for apprehensive shareholders, but what they really want is for the company to pay attention to their knits and move away from strange new virtual worlds.

“There is a healthy degree of skepticism among Wall Street about the scale of the investments,” says Brent Thiel, managing director at Jefferies, about Meta pricing’s focus on the metaverse. “Investors are 100% against it, because there is no short-term payoff,” he adds, along with recession fears and low advertising revenue.

It’s not the meaning itself that makes investors wary, Tells says. Rather, it is the scale of the investment, which is apparently “too aggressive from the top”, compared to the “impact that will largely achieve its core”. In other words, advertising.

In the year since Meta announced its name change from Facebook to reflect an investment shift to the as-yet-undefined metaverse, the company has rolled out a series of products and apps to increase its popularity with users on its platforms — everything from non-fungible tokens integration on Facebook and Instagram to creating Horizon World. its own. But with modest revenues of $2 billion in the next three quarters despite all the investments, Meta has incurred a cumulative operating loss of $9.1 billion since the third quarter of 2021, according to Meta’s second-quarter earnings. Power point.

This has been a poor year for the stock market overall, but for Meta it has gone from bad to worse. that it 10.75 The price-to-earnings (PE) ratio is nearly the lowest since the company went public in May 2012.

Investors were only willing to pay 10.5 times the company’s free cash flow (FCF) for its shares at the end of September, lower than the 14.0 they were offering for all shares in Telecom Services Select Sector SPDR ETF (XLC). Meta, the largest component of this fund at 17.7%, traded at a premium over it at the end of last year, 24.6 times FCF versus 18.8. Free cash flow is a measure of money available for shareholder benefits such as dividends and stock buybacks or for reinvestment in a business.

says Mark Shmulek, managing director and chief US Internet analyst at AllianceBernstein Investment Manager and Researcher.

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Thiel says the “big storm hitting advertisers” is one of the main reasons its core business is down. A battle between ByteDance’s Meta Instagram and TikTok for ad revenue and a younger audience also doesn’t help.

There is also the question of how much of the metaverse really is Horizon World. During the company’s annual Connect conference, CEO Mark Zuckerberg emphasized that the project’s future is “open” and “interoperable.” But the technology Meta uses is traditional and lacks the decentralization elements like blockchain or other distributed ledger rule that would set it apart from the so-called walled gardens approach to social media. Although it has been treated in different ways, the metaverse is often seen as an immersive version of the internet with both virtual and augmented reality components.

“You can still have the Metaverse unlocked depending on the approved criteria,” says Kathy Hackle. Forbes Contributor, founder and leader of the metaverse studio at Journey, a web design consultancy. “But you cannot have a decentralized Metaverse with true interoperability without a blockchain.”

In fact, it was the company’s latest attempt to lure a file prospects for metaverse It was a series of engagements with traditional tech giants like Microsoft
and Accenture
and the least common zoom. These deals, which are aimed at increasing adoption of the concept by big companies, are reassuring to investors, says Shmulek, even if they go against the vision of a decentralized future.

“It’s the single largest economic engine announced” at Connect, adds Laura Martin, Senior Entertainment and Internet Analyst at Needham.

In the long run maybe. But at present, the dividends for metaverse adaptations that primarily target consumers are bleak. Blockchain-based worlds including Decentraland and Sandbox, among the favorites of metaverse enthusiasts, continue to see negative annual return on investment (21.92% And the 6.71%, respectively) according to data from Messari. The Meta before Microsoft Horizon Worlds doesn’t seem to perform any better when it comes to user activity. According to the internal documents he obtained The Wall Street JournalIt currently has about 200,000 monthly active users, down from 300,000 in February. Mita did not respond to Forbes Request for comment to confirm existing user numbers.

Thill and Shmulik agree that a return to its core business – advertising – would be good for Meta.

“There’s probably a view that says, ‘Look, the more they spend on the metaverse, the more they’ll admit that a downturn in core business is more imminent than we thought,'” Shmulik says.

Meta announcements haven’t been horrible over the past two quarters, with the company making nearly $27 billion in the first quarter and more than $28 billion in the second quarter, similar to levels corresponding to 2021. However, advertising revenue wasn’t enough to combat rising expenses, and net income for the first half was $14.2 billion, down from $19.9 billion in 2021.

Shmulek says he expects the third quarter to reflect an increased focus on ad revenue and user engagement to allay investor concerns. But according to FactSet’s forecast, that will leave ad revenue at around $27.2 billion, down nearly 4% from the previous year.

“I don’t actually think the success or failure of the metaverse is really meaningful to the current stock price trajectory and how investors view the stock,” he adds. That lack of interest may be for the best, as the consensus on Wall Street is that Reality Labs’ third-quarter operating loss will widen to $3.7 billion, the largest quarterly deficit to date, when the company reports results after trading closes on Wednesday.

Overall, Meta is expected to earn $1.90 per share on an adjusted basis used by analysts, down from $3.22 last year, while revenue drops to $27.4 billion from $29 billion. Net debt is expected to reach $54.9 billion from $47 billion in the second quarter after the company tapped into bond market For the first time, it sold $10 billion in August.

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