The metaverset has garnered a lot of attention in recent months, despite great uncertainty about what it will look like in a few years or decades. It also means there are big strangers concerning the profitability of the meta-verse for companies active in this field. That said, major players such as Meta Platforms, Inc. (NASDAQ: FB) and Microsoft Corporation (NASDAQ: MSFT) invest massively in this area and seek to grow their business significantly over the years through the opportunities in the metaverse. In this article, we will compare Meta Platforms and Microsoft.
The management of both companies has expressed a desire to become big players in the meta-verse. Meta Platforms even went so far as to change its name to emphasize how important the metaverse (allegedly) will be to the company in the future.
Meta Platform’s goals include a strong position in virtual and augmented reality games. The company therefore started buying gaming companies specializing in this area. Meta has a dedicated metaverse business unit called Reality Labs. It is so far deeply unprofitable. In the last quarter, Reality Labs generated a loss of $ 3.3 billion, or more than $ 13 billion annually. Of course, not all shareholders were satisfied 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 gaming offerings, but Meta Platforms also seeks 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 offer consumers the opportunity to experience a wide range of other things “in Metaverse”. Traveling to other places (geographically as well as in time) is one such service – people will be able to see old cities, for example.
All of this requires huge investments in both hardware and software, which is why Metas Reality Labs is such a loser today. However, if things go well and the company’s offerings become as attractive and as widely used as the company’s executives believe, these current investments can pay off really well in the future. Investors should not assume that this will happen within the next one or two years. Instead, investing in Meta’s metaverse is likely to take several years to pay off.
Microsoft is not as ambitious as Meta Platforms, but MSFT still offers significant exposure to the meta-verse. It is also increasing its exposure to gaming, both through organic investment and through the planned acquisition of Activision Blizzard (ATVI), which is likely to close sometime next year. Not all games are and will be AR / VR-based, but it is understandably a segment that Microsoft will continue to expand into over the years. Microsoft is also looking to become a leading company in the “trade metaverse”. Unlike Meta Platforms, it is not a purely consumer-centric company. Instead, MSFT will offer metaverse business meetings and similar technologies through its Teams platform and others. Microsoft has not allocated its metaverse investments as accurately as Meta Platforms, but it seems reasonable to assume that MSFT is also investing heavily in this area – and that Microsoft’s metaverse business is also losing money at the moment.
In the long run, both companies have created significant value for their shareholders. But in recent years, Microsoft has been the best performer.
Over the past three years, Meta Platforms has mostly been lying flat, while Microsoft has more than doubled its stock price while paying dividends. Both companies actually grew more or less in parallel until the summer of 2021, but Meta has seen the share price fall rapidly over the past two months due to higher growth expectations, lower than expected. However, I think it is an overreaction of the market. The general growth trends for Meta are still in place, and the company also still expects significant revenue growth this year – only at a slightly lower rate.
Key targets for FB and MSFT actions
Meta Platforms saw its revenue increase by 20% in the last quarter – far from bad, I think. In fact, the company hit a bit of revenue estimates, even though its earnings were lower than expected. This was the result of its larger than expected investment in its metaverse business, which is currently hurting profitability. That said, Meta was still deeply profitable, generating a net profit of just over $ 10 billion in a single quarter.
Of course, Microsoft is even more profitable. The company, which also saw its revenue grow by 20% – a pace comparable to the growth of Meta Platforms – generated a net income of almost $ 19 billion last quarter, making it one of the most profitable companies in the world. .
From a basic perspective, both companies look very solid. For example, their margins and return on capital are very attractive:
Both companies generate operating margins of around 40%, with MSFT’s margin even slightly above this level. This reduces the risks to the business of the company as even some pressure on margins would make them very profitable. A company with a low margin could see its profits disappear completely when it experiences a headwind of a few hundred basis points, for example due to inflation. However, MSFT and FB would not feel much influence. Their strong margins also mean that every extra revenue crown is extremely increasing and generates a lot of shareholder value.
Similarly, their return on assets and return on invested capital are very attractive – and the two targets are relatively comparable between the two companies.
Both companies also have fortress balances. This is important for two reasons. First, it reduces the risk as companies have a lot of flexibility and resilience if their business encounters temporary problems. In addition, their large liquidity allows them to be active in mergers and acquisitions (see MSFT’s acquisition of ATVI) and in terms of shareholder returns.
Microsoft repurchased $ 27 billion worth of stock over the past year, while paying another $ 20 billion in dividends over the same period. Meta Platforms, meanwhile, has repurchased $ 45 billion worth of stock over the past year, much of which was repurchased in the last quarter. On a shareholder return basis, however, Meta looks much stronger. Its market capitalization of $ 540 billion indicates a shareholder return of over 8%, while Microsoft’s shareholder return is around 2.5% due to Microsoft’s much larger market value of more than $ 2 trillion.
The two companies also differ a lot when it comes to valuation. Meta runs an attractive business, but Microsoft is without a doubt an even stronger company. Not only is it rated for triple A, but Microsoft also has one of the largest moats in any listed company in the world, I think. So it makes sense that it is traded at a somewhat higher valuation compared to Meta, but I do not think the premium should be as large as it is:
Meta trades at a company value relative to EBITDA ratio of only 8, while trading at an FCF dividend of around 8%. Meanwhile, Microsoft is trading at an EBITDA multiple of 21x, while offering a free cash flow dividend of around 3%. In other words, Microsoft is about 2.6 times more expensive than Meta – I do not think Microsoft’s rating premium should be that high. The valuation prize was also much smaller in the past – sometimes FB even traded for a prize for MSFT. This further reinforces my belief that FB is the best value today as it looks incredibly cheap compared to MSFT, even considering that MSFT’s business model may be a bit stronger than Meta Platforms.
Are MSFT and FB good long-term investments?
Both companies are active in industries that benefit from long-term macro tailwinds, such as digitization, growing digital media consumption, video games and more. Both companies have strong balances and have generated excellent returns with the capital they employ.
From the perspective of business prospects, growth potential, fundamentals and business risks, both companies therefore look like convincing long-term investments. Due to its extraordinary moat, Microsoft may be the even stronger company out of the two on a fundamental basis when we discount valuation.
Is FB or MSFT the best buy?
As mentioned above, both stocks represent quality investments, I think. In terms of shareholder return (relative to market value) and valuation, Meta Platform looks like the most attractive investment – it’s just incredibly cheap despite growing at the same rate as Microsoft over the last quarter.
Both companies offer great exposure to the metaverse. FB is consumer-focused here, while MSFT is more business-focused in its metaverse approach. Whether one favors one over the other depends on individual preferences, I think. In a similar assessment, I would probably prefer Microsoft, although Meta Platforms is also a quality investment. But with Meta trading at less than half of Microsoft’s valuation, I think Meta Platforms is the most attractive investment at current prices.