Prediction: Pivoting Away From Metaverse Will Help Meta's Stock Long Term
Key Points
Stepping back from the money-losing metaverse is a smart long-term move.
There is an argument that the company should also focus on its core business and outsource much of its AI development.
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Meta Platforms (NASDAQ: META) recently announced that it will be sunsetting its virtual reality platform Horizon Worlds. The app will be removed from its Quest VR headsets on June 15, although it will still be available in some form on its mobile apps. The move signals that the company is finally pivoting away from its failed metaverse ambitions.
Horizon Worlds was once one of the key parts of Meta's metaverse strategy. However, the concept never took off, and Meta's Reality Lab division has piled up nearly $80 billion in losses since 2020, including more than $6 billion last quarter.
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Given the money the company had poured into the project, it could have tried to keep it alive. However, sunk costs are not a good reason to throw good money after bad at the metaverse, and as such, I predict this will be good for the stock long term.
Image source: Getty Images.
Meanwhile, it should more immediately start to reduce its losses from the division, which would boost Meta's overall profits. Meta can use its newfound savings to continue to build out its AI infrastructure and pursue its AI ambitions.
However, I think that it could be a good idea for the company to shift from this strategy, as well. It has been reported that its new Avocado AI model has been delayed due to its underperformance versus competing models. That comes despite the company pouring money into AI infrastructure and spending big on hiring top AI talent.
Is it time to outsource?
However, I'd question if Meta really needs to be spending as much on AI as it is. The company has proven that it is as good as anyone at applying AI to drive growth in its core business. It has incorporated AI into its recommendation engine to help better identify the interests of its users to feed them more of the content they are interested in. At the same time, it's given its small and medium-sized advertisers the AI-powered tools they need to better track and convert users.
That said, there is an argument to be made that the company doesn't need to be building its own foundational AI models, and it could be much better served by outsourcing much of its AI development to a company like Alphabet and using its Gemini model as the basis of its AI development moving forward. This would save it a lot on capex spending and greatly improve its free cash flow.
Meta is one of the best companies in the world at monetizing its user base, and if it sticks to that lane, I believe the company could be better off in the long run and that its stock will command a higher multiple.
Regardless of whether Meta decides to keep building up its AI platform or not, though, pivoting from the metaverse is the best move it could have made right now, and it will be a positive for the stock long term.
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Geoffrey Seiler has positions in Alphabet and Meta Platforms. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
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