It's been a bad year for tech. Even "safe" stocks with wide moats, lots of cash, and good long-term growth prospects, such as Microsoft (MSFT 1.22%), are down a lot. Microsoft is down a whopping 32.5% on the year -- even more than the overall market.
If an AAA-rated company like Microsoft is down that much, you can imagine how other tech stocks have done if things haven't gone perfectly. Case in point: Meta Platforms (META -0.65%), which is down a stunning 62% on the year.
With Meta now trading at a bargain-basement valuation, it just got a helping hand from none other than Microsoft itself.
Metaverse spending has drawn skepticism
Meta's stunning decline shows a lack of faith from investors on Zuckerberg's metaverse vision. Meta printed $5.8 billion in operating losses in its Reality Labs segment over the first six months of 2022, with management apparently content to continue making heavy investments in pursuit of metaverse leadership. While CEO Mark Zuckerberg believes the future potential market is in the hundreds of billions of dollars per year, as of now, Meta's Reality Labs segment makes minimal revenue, compared with its overall business.
Investor impatience is also being amplified by declines in the core business across Facebook and Instagram. Last quarter, those two megaplatforms reported a slight decline in revenue, with more projected for the third quarter. A weak advertising environment, the competitive threat of Tik Tok, and currency fluctuations are all conspiring to lower revenue for the first time in these platforms' histories.
With a core business that generates profits but may not be a big growth engine going forward, it's crucial the company continues to show progress on its big metaverse bet.
Image source: Getty Images.
The Metaverse will include Windows, Teams, and other Microsoft products
On Tuesday, Meta's metaverse project got a nice jolt of confidence when Microsoft CEO Satya Nadella appeared at the Meta Connect 2022 conference. At the event, Meta showed off its latest VR headset, the Quest Pro, which will retail for $1,500, an increase from $1,100 for last-year's Quest 2. It will be available for purchase starting October 25.
The segment with Nadella highlighted how Microsoft's enterprise apps, from Teams to Office 365 to security apps, would be integrated seamlessly within Meta's Horizon virtual-office environment.
While some only think of VR as a gaming device and potentially a social platform, Meta has eyes on the enterprise space, as well. The lack of enterprise exposure is a key current weakness in Meta's business portfolio, compared with other major FAANG names. One could argue enterprise businesses are more desirable than consumer ones as they tend to be stickier, with more stable customers, due to switching costs.
There isn't a bigger enterprise-software vendor than Microsoft, so it was great to see Microsoft getting behind Meta's new virtual workspace. It may seem strange, since Meta is also developing its own virtual-collaboration software and Microsoft also has its own HoloLens VR product.
However, under Nadella, Microsoft has opened up its software to rival ecosystems, such as Apple's (AAPL 0.62%) iOS operating system. That was a departure from how Microsoft used to behave in the 1990s and early 2000s, when it sought to boost sales of its own Windows OS by only allowing its widely used software on Windows devices. However, opening itself up to other platforms has been a win-win for both Microsoft and Apple, and it appears Microsoft and Meta think the same will be true of the metaverse.
Can Microsoft help Meta turn things around?
Microsoft's endorsement of "office VR" likely won't help Meta's stock in the near term. More likely, the immediate movement in Meta's stock will be based on the performance of Facebook and Instagram.
On that front, Meta is investing heavily in its Reels feature, powered by a new GPU-fueled artificial-intelligence (AI) engine, to better compete with Tik Tok. The downside is that Reels doesn't monetize as well as regular newsfeed ads just yet.
On the upcoming third-quarter earnings call, investors should probably be listening for how Reels are performing, as well as the state of digital ads today. That's the most important factor in Meta's current revenue and profit trajectory.
However, there may also be more color on how Meta plans to monetize the metaverse in the future. While management has alluded to the sale of VR headsets and digital goods, enterprise revenue would certainly help a lot. Perhaps management will discuss how it plans to monetize the virtual office of the future.
