Meta Stock: Apple Wants to Disrupt Mark Zuckerberg’s Metaverse (NASDAQ:META)

Meta Platforms, Inc. (NASDAQ: META) investors who added exposure to its November sellout lows continued to outperform the S&P 500 (SPX) (SPY). As a result, despite the pessimism over CEO Mark Zuckerberg’s metaverse ambitions, META has recovered almost 50% of our November article. Compared to the 6% rise in the SPX, investors must be wondering what gave the bulls the ammunition to stage such a remarkable rally?

It’s quite simple. Valuations and price action. Investors got so pessimistic in November that they dropped META’s NTM EBITDA multiple to 5x, well below the zone of two standard deviations below its 10-year average. What does that mean? This implies that META’s valuation has been stretched lower, creating a high-potential mean reversion opportunity.

We have also pointed out to members of our service, indicating that such an opportunity is possible:

When such a strong sell-off occurs, creating a gap, the sell-off should subside before a strong mean reversion. You can see how this happened in META’s price action. This is therefore the second gap-closing event in 2022, creating another mean reversion opportunity. META’s price action is now significantly below its 50-period moving average (blue line), so I think the selling should calm down. Then, a countertrend rally could form, [bringing] bring it back to one of its moving averages before selling yields. – Meta update, Ultimate Growth Investing, November 5, 2022

As such, mean reversion has occurred with incredible power, likely catching the bears in November off guard.

Meta Platforms is still a profitable business, even though Reality Labs or RL (the metaverse division of Meta) has eroded a significant level of operating profit. As a reminder, RL had revenue of $1.43 billion in the first nine months of FY22, but had an operating loss of $9.44 billion.

Meta said he saw an improvement in the operational performance of RL as it scaled, as he added in his docs:

these [increases in expenses] were partially offset by a decrease in RL cost of goods sold and a $472 million reduction in our estimated losses on purchase commitments in the second quarter due to a price increase on Meta Quest 2. (Meta 10 -Q)

But things could be about to get worse for Zuckerberg. Why?

Bloomberg and The Information today consecutively reported Apple’s (AAPL) plans to release a “cheaper” mixed reality (MR) headset that combines AR and VR, taking on Meta’s Quest 2, which is said to have “AR capabilities limited”.

Meta investors who think Apple will let Zuckerberg define the era in mixed reality must be in for a nasty surprise. Nonetheless, Apple’s investment and likely launch of its high-end mixed reality device this year has been known for some time. However, this device is intended to target the enterprise/commercial market given its price range, which suggests no imminent threat to Meta’s Quest 2.

However, Apple is said to have abandoned the development of its AR glasses in favor of the lower-cost headset, as the technical hurdles to a successful launch of AR glasses have proven to be too complicated at this time.

Although the launch is not expected in 2023, we believe that Apple could also accelerate its development if the technical barriers are lowered. As Apple seeks to price its mixed reality headset in its iPhone series lineup, we believe Meta is poised for a massive showdown to preserve its current leadership in the AR/VR device market.

Importantly, the success of Meta’s RL division is critical to the company’s definition of “the next chapter of the Internet”. As such, it has invested significantly, with its RL workforce estimated at around 3,000. Mark Zuckerberg has also allocated 50% of his RL budget to AR and 40% to VR, according to an internal meeting in November 2022.

Notably, it’s more than the “1,000+ person unit” of Apple’s technology development group, the vast majority of which Bloomberg pointed out are focused on developing its MR headsets. However, Meta’s commitment extends beyond headsets alone, encompassing “several virtual reality headsets, augmented reality goggles, and associated software.”

While it may seem that Meta has invested more aggressively in its attempt to define the MR ecosystem, it may not necessarily yield long-term success against Apple.

Note that Apple’s MR team could rely on the company’s hardware and consumer silicon engineering teams for expertise. Additionally, it continued to integrate its supply chain as it seeks to reduce its reliance on third-party supplies such as Broadcom (AVGO) and Samsung (OTCPK:SSNLF), improving its ability to customize and reduce costs.

In contrast, Meta’s experience piloting its ecosystem and chips with Qualcomm (QCOM) suggests that the company may not have the technical advantage over Apple.

With AR and VR shipments expected to reach 48 million by 2025 (nearly 50% four-year CAGR), Apple likely sees the opportunity as a “significant moneymaker.” It could also help pave the way for a possible long-term AR glass launch, technology permitting.

As such, we believe Meta’s investment and leadership ambitions in the metaverse could be in serious jeopardy, forcing investors to carefully assess whether its current valuation is fair to take on additional exposure.

With an NTM EBITDA multiple of 7.2x, it is still lower than the 9.8x NTM EBITDA multiple of advertising leader Google (GOOGL) (GOOG). It is also lower than the 16.4x multiple of the AAPL.

Therefore, META bulls might argue that there is more upside potential going forward, despite its knocks in 2022. While Apple could be a credible threat, META’s valuation looks “too cheap to be ignored.

META’s November low has clearly attracted dip buyers as it recently moved back above its COVID lows.

However, META remains mired in a medium-term downtrend, and its recovery momentum could also be hampered by its downside resistance zones.

As such, we think it’s appropriate for investors to consider withholding greater exposure, as they assess the company’s response to Apple’s MR developments at its upcoming earnings conference on February 1st.

Although seemingly cheap, META’s long-term recovery depends a lot on its ability to successfully build its metaverse ecosystem. Unfortunately, Apple’s MR plans could effectively counteract this, relegating META to being valued accordingly as a “cheap” stock and no longer a long-term growth opportunity.

Note: Hold (repeated).