Virtual reality has clashed with financial reality lately, but the two might find a way to coexist.
The metaverse was the talk of the technology sector over the last few years as stock market pundits outlined scenarios that involved virtual worlds generating trillions of dollars in value in the decades to come.
But 2022 delivered a different reality. The economy suffered a slowdown, and enthusiasm for long-shot tech projects that won't be profitable in the foreseeable future hit a low point. The Nasdaq-100 Technology Sector index epitomized that shift in sentiment with a decline of 33% in 2022, and many individual stocks sank even further.
But the pessimism has let up in the early days of 2023. The sector index has registered a gain of 13% so far, and stocks typically associated with the metaverse -- like Meta Platforms (META-2.66%) and Snap (SNAP-4.71%)-- have soared even further. Let's explore why and what could be in store from here.
1. Meta Platforms commits to cost cuts $Meta Platforms, Inc.(META)$
Investors have lambasted Meta Platforms over the last 18 months as its stock embarked on a peak-to-trough plunge of 76%. One prominent big-tech investor, Brad Gerstner of Altimeter Capital, suggested the company needed to cut 20% of its workforce and limit spending on the metaverse to just $5 billion per year in order to offset the slowdown in its core Facebook and Instagram platforms.
Meta responded by recently trimming 11,000 jobs (13% of its head count), but there's no sign yet of a slowdown in metaverse spending. Its Reality Labs segment, which is developing the project, lost $13.7 billion in 2022, including $4.2 billion in the fourth quarter alone -- the highest quarterly loss since inception.
CEO Mark Zuckerberg envisions a future with 1 billion users in his company's virtual worlds, with each user spending hundreds of dollars on digital goods and services. It doesn't take much imagination to see that translates to a substantial amount of revenue. But that could be years away, and Meta Platforms' core business is currently under siege by a weak economy and a competitive threat from ByteDance's TikTok.
Businesses cut back on their marketing budgets in 2022 as inflation ripped through the global economy, pushing interest rates higher and crushing consumers' spending power. Since Meta's core apps like Facebook and Instagram rely on advertising, the company's total revenue dipped 1% compared to 2021, coming in at $116.6 billion.
But the fourth quarter brought some reprieve for investors, as Zuckerberg committed to running a more efficient operation by managing costs more carefully. Plus, the company's Q4 revenue came in at $32.1 billion, which was the highest level of 2022, and its net income ticked up after three consecutive quarters of decline.
As a result, Meta Platforms stock soared, and it's now up 39% in 2023 -- triple the gain of the Nasdaq-100 index. But it's not too late to buy, because there might beplenty of upside left in the tank.
2. Snap's future is in augmented reality, metaverse or no metaverse $Snap Inc(SNAP)$
Snap is the parent company of popular social media platform Snapchat, and it has a different vision for the metaverse than its rival Meta Platforms. While Meta is focused on a fully immersive virtual reality experience, Snap pictures the digital world as an extension of the physical one. Therefore, it's focused on augmented reality (AR) instead.
The company has designed wearable glasses called Spectacles. They're similar in size and shape to regularly styled eyewear, except they can beam digital enhancements into the user's vision while they go about their day.
Like Meta, Snap's core business relies on advertising, and it was decimated in 2022, though the company did manage to deliver full-year revenue of $4.6 billion, up 12% compared to 2021. It now has a lesser focus on its metaverse vision, but it's using augmented reality to deliver new advertising experiences for businesses with great success.
Clothing retailers, for example, can offer try-on experiences to customers on Snapchat, transforming their smartphones into a virtual changing room. European fashion giant Zalando ran a campaign using the technology in Q4 and saw conversion costs plunge by 46%. In other words, it was generating almost twice the number of orders per dollar compared to non-AR campaigns.
With results like that, AR will almost certainly play a much bigger role in advertising in the future, and Snap is a technological leader in this area.
When the company reported its 2022 full-year results, investors initially sold the stock, but it quickly recovered and sits on a 20% gain in 2023, beating the 13% return of the Nasdaq-100. Snap's daily active user base jumped 17% year over year to 375 million in 2022. As long as the user base continues to grow, Snap will have a larger base to monetize when the economy recovers, which should reignite its revenue.
Despite the strong gain in 2023 so far, Snap stock remains down 87% from its all-time high. That might be a golden opportunity for investors with the long term in mind.
Source: The Motley Fool
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