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Virtual reality is a much bigger deal than most investors believe, and that means a big opportunity.
The App Store rankings came out on Tuesday for software downloaded during the Christmas holiday. The most downloaded app was Oculus, the software for Meta Platforms (FB) virtual reality headsets.
Investors should ignore the haters and buy Meta Platforms.
Oculus should be familiar. The VR headset is at the center of an ambitious plan by Meta Platforms to build out of the Metaverse, an alternative digital reality where people will eventually work, play games and interact, according to Mark Zuckerberg, chief executive. In a corporate blog in October he detailed how the company will spend $10 billion over the next several years building infrastructure to help developers take the new digital world mainstream.
As farfetched as this may seem it is not that big of a leap. Several metaverses exist right now.
Fortnite, a virtual world platform for online gaming has become a $5 billion annual business for Epic Games, the parent company. Inside Fortnite, the company has held virtual concerts with Travis Scott and other large events that members can experience from the comfort of their living rooms. Meanwhile, Epic gets to sell tickets and virtual goods and services like avatar outfits and gameplay enhancements.
Roblox (RBLX) is another metaverse gatekeeper. The company reported in November that revenues soared to $638 million, up 28% from a year ago. The software platform mainly caters to children and is sometimes called digital Lego. Some 164 million monthly active users can build online worlds, play games from app developers, shop and communicate.
Meta Platforms is taking its metaverse to the next level. The Menlo Park, Calif.-based company will spend lavishly reaching out to developers to build all facets of a new digital reality. Metaverse members will be able to setup virtual shops where they will sell both real world and virtual goods. Corporations will hold conference calls. And there will be next level gaming.
That’s where Oculus comes in. Meta Platforms purchased Oculus in 2014 to widespread skepticism. At the time VR certainly was not ready for primetime. Using the headsets for prolonged periods caused nausea. Unfortunately, those poor first impressions have lingered.
The App Store data shows there is a market for VR, and it is much bigger than the current perception.
The Oculus app topped perennial store favorites like Tik Tok, YouTube, SnapChat, Instagram and Amazon Alexa. All of these are established digital communications platforms. It is also the first time Oculus has been in the top 10 during the holidays, according to a report at Quartz.
Critics have argued that Meta Platforms can’t succeed because the company lacks the public trust of firms like Apple, Alphabet (GOOGL), Amazon.com (AMZN) or Microsoft (MSFT). This is simply not true. Meta already won social with its Facebook platform. The metaverse is the evolution of social.
Currently Facebook is fueled by digital advertisement spending. Members come to its portal where they are captive to ads. Facebook sets the rules and costs because it owns the platform. Its analytic tools allow ad buyers to slice up demographics and do A/B testing that is impossible on other platforms. For these services Facebook commands 80.5% gross margins.
According to a report at Statista, global digital advertising in 2020 was estimated at $378 billion. Researchers believe that figure will reach $646 billion by 2024 as buyers move away from less measurable mediums such as outdoor, print, television and radio.
Oculus and the metaverse will give Meta a new platform to extend that business. It will also surely mix-in ecommerce, application sales and other business verticals.
Investors are sleeping on this opportunity because pundits believe nobody trusts Zuckerberg or Meta, and technology worn on your face seems untenable. The popularity of Facebook, Instagram and now Oculus should dispel this mythology.
At a price of $346.22, the stock trades at 24.3x forward earnings and 8.5x sales. Given the growth of digital ad spending, Meta’s gross margins, and the new popularity of Oculus these metrics seem cheap.
Investors should consider buying Facebook into any significant weakness.