The Metaverse has been getting a lot of attention in recent months, despite huge doubts about what it will look like in a few years or decades. This also means that there are great unknowns Regarding the profitability of the metaverse for companies active in this field. However, major players such as Meta Platforms, Inc. (Nasdaq: FBand Microsoft CorporationNasdaq: MSFT) are investing heavily in this field and are looking to grow their business significantly over the years through metaverse opportunities. In this article, we are going to compare Meta Platforms and Microsoft.
The management of both companies has expressed a desire to become major players in the metaverse. Meta Platforms has even gone so far as to change its name to emphasize how important the (supposedly) meta to the company will be in the future.
The goals of the Meta Platform include a strong position in virtual and augmented reality games. So the company started buying gaming companies specializing in this field. Meta has a dedicated metaverse business unit called Reality Labs. It is, at the moment, not very profitable. Last quarter, Reality Labs lost $3.3 billion, or more than $13 billion annually. Of course, not all shareholders were happy with this development, as it is not certain that these investments will be profitable in the foreseeable future.
The company’s goals include building VR/AR game offerings, but Meta Platforms is also looking to offer a wide range of other services. This includes Metaverse communities where people can interact and communicate using avatars, while Meta also plans to provide consumers with the ability to experience a wide range of other things “in the Metaverse.” Traveling to other places (geographically and temporally) is one such service – people will be able to see ancient cities, for example.
All of this requires huge investments in both hardware and software, which is why Meta Reality Labs is a loser today. If all goes well and the company’s offerings become as attractive and popular as company executives believe, these current investments could well pay off in the future. Investors should not assume that this will happen in the next year or two. Instead, investments in the meta metaverse are likely to take several years to start paying off.
Microsoft isn’t as ambitious as the meta platforms, but MSFT still provides great exposure to metaverse. It is also increasing its exposure to gaming, both through organic investments and through the planned acquisition of Activision Blizzard (ATVI), which is likely to close sometime next year. Not all games are AR/VR based, but understandably, this is a part that Microsoft will continue to expand over the years. Microsoft is also looking to become a leader in the “metaverse commerce”. Unlike Meta Platforms, it is not a completely consumer-focused company. Instead, MSFT will offer metaverse business meetings and similar technologies through the Teams platform and others. Microsoft hasn’t dedicated its investments to the metaverse quite like the Meta Platforms, but it seems reasonable to assume that MSFT is also investing heavily in this area – and that Microsoft’s metaverse business is losing money at the moment too.
In the long run, both companies have created significant value for their shareholders. However, in recent years, Microsoft has been the best performer.
Over the past three years, Meta Platforms have been mostly flat, while Microsoft has more than doubled its stock price with dividends paid out on top. In fact, both companies grew more or less in parallel with each other until the summer of 2021, but Meta saw a rapid drop in its share price over the past couple of months due to higher, lower-than-expected growth expectations. However, I think this is an overreaction by the market. Meta’s overall growth trends remain, and the company continues to expect significant revenue growth this year — at a slightly slower pace.
Key metrics for FB and MSFT actions
Meta Platforms saw a 20% increase in revenue last quarter — far from bad, I think. In fact, the company slightly beat revenue estimates, even though its earnings were lower than expected. This was a result of its larger-than-expected investment in its metaverse business, which is currently hurting profitability. However, Meta was still very profitable, generating a net profit of just over $10 billion in one quarter.
Microsoft is more profitable of course. The company, which also saw 20% revenue growth — a pace similar to that of Meta Platforms — generated a net income of nearly $19 billion last quarter, making it one of the most profitable companies in the world. .
From a fundamental perspective, both companies look very strong. For example, its margins and return on capital are very attractive:
Both companies generate operating margins of around 40%, with MSFT’s margin just above that level. This reduces the risk to the company’s business, as some pressure on margins will make it very profitable. A low-margin company could see its earnings completely disappear when it faces a headwind of a few hundred basis points, for example due to inflation. However, MSFT and FB will not feel much impact. Their strong margins also mean that every extra dollar of revenue is highly cumulative and generates a lot of value for shareholders.
Likewise, return on assets and return on capital employed are very attractive – and the two metrics are relatively comparable between the two companies.
Both companies also have solid budgets. This is important for two reasons. First, it reduces risk, as companies have a great deal of flexibility and flexibility in case their business encounters temporary problems. In addition, their significant liquidity allows them to be active in mergers and acquisitions (see Acquisition of ATVI by MSFT) and in terms of shareholder return.
Microsoft repurchased $27 billion in stock over the past year while paying an additional $20 billion in dividends over the same period. Meanwhile, Meta Platforms has repurchased $45 billion worth of stock over the past year, with a lot of those buybacks happening in the last quarter. However, on a shareholder return basis, Meta looks much stronger. Its market capitalization of $540 billion indicates shareholder return of over 8%, while Microsoft’s shareholder return is around 2.5% due to Microsoft’s much larger market capitalization of more than $2 trillion.
The two companies also differ a lot when it comes to valuation. Meta runs an attractive company, but Microsoft is arguably a stronger company. Not only is it an A’s, but Microsoft also has one of the biggest moats of any publicly traded company in the world, I believe. So it makes sense that it is trading at a somewhat higher valuation compared to the Meta, but I don’t think the premium should be as large as it is:
Meta trades with an institutional to EBITDA ratio of just 8, while it trades with an FCF return of around 8%. Meanwhile, Microsoft is trading at an EBITDA multiplier of 21 times while offering a free cash back of around 3%. In other words, Microsoft is about 2.6 times more expensive than Meta – I don’t think Microsoft’s rating premium should be that high. The valuation premium has also been much smaller in the past – sometimes FB traded at a premium to MSFT. This reinforces my belief that FB is the best value today, as it seems incredibly cheap compared to MSFT, even considering that MSFT’s business model may be a bit more powerful than Meta Platforms.
Are MSFT and FB Long Term Investments Good Investments?
Both companies are active in industries that benefit from the overall tailwind in the long run, such as digitization, increased digital media consumption, video games, and more. Both companies have strong balance sheets and have achieved excellent returns on the capital they are using.
From the perspective of business prospects, growth potential, fundamentals, and business risks, both companies look like compelling long-term investments. Microsoft, given its exceptional moat, may be the stronger company of the two on a fundamental basis when we discount the rating.
Is FB or MSFT the Best Buy?
As mentioned above, both stocks are high quality investments, I think. In terms of shareholder returns (relative to market capitalization) and valuation, the Meta Platform seems like the most attractive investment – it’s extremely cheap despite growing at a similar rate to Microsoft over the last three months.
Both companies offer great exposure to metaverses. Here FB focuses on the consumer, while MSFT is more business-focused in its metaverse approach. I think whether or not one prefers one over the other depends on individual preferences. On a similar rating, I probably prefer Microsoft, although Meta Platforms is also a good investment. But with Meta trading at less than half of Microsoft’s rating, I think Meta Platforms is the most attractive investment at current prices.