betting on virtual reality is probably bigger than you think and can hide the true profitability of the company’s main social media business.
This is the take on Monday morning from Evercore ISI analyst Mark Mahaney. In a detailed research note, it states that Facebook (ticker: FB) is on track to sell more than eight million Oculus Quest 2 virtual reality headsets in its first year. (The Quest 2 was released in October). He thinks investors don’t quite appreciate the size of Facebook’s investment in VR. According to him, the total is high enough because the operating margins reported by the company underestimate the operating margins of the rest of the business. He thinks actions “can justify” a higher multiple.
He repeats his Outperform score and the $ 400 stock price and says Facebook remains one of his best options.
Mahaney notes that Facebook CEO Mark Zuckerberg said at the company’s fourth-quarter earnings conference that Quest 2 would be “the first major virtual reality headset.” Mahaney estimates, based on industry reports and his own analysis, that the company has sold between five and six million units to date, putting it at a rate of eight million in the first year. With an average price of about $ 300, that means revenue of about $ 2.4 billion, or about 3% of Facebook’s overall revenue.
The analyst notes that The Information recently reported that Facebook has about 10,000 people working on virtual reality devices. Mahaney estimates the company will generate operating losses of between $ 5.4 billion and $ 6.4 billion this year in its virtual reality business. Calculate that a loss of this magnitude translates into a reduction in the company’s operating margin of approximately five or six percentage points; he believes the total could be in the range of 43% to 44% instead of the 37.8% he has been modeling for the year. The implication is that Facebook’s earnings are off by about $ 2 per share due to the investment in Oculus.
“On a stand-alone basis, we find Facebook’s rating very appealing,” Mahaney wrote. “We see a trade of assets of big growth, high margin and big scale with a discount with regard to his rhythm of growth. That’s a little scarce. ”
Actions are even more compelling, he adds, when adjusted for virtual reality losses. He claims to withdraw the company’s $ 62 billion in cash, and that the actions translate into “extremely attractive” 18 times estimated 2022 profits.
In Monday morning trading, Facebook rose 0.5% to $ 343.17.
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