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What do we know about the Metaverse?

The Metaverse is a concept (for now). A concept that has motivated Facebook to change its branding to Meta and begin developing the infrastructure of a meta-universe. The drastic pivot that Facebook is attempting to pull off, the Company hopes, will put it at the forefront of the internet’s “next frontier”, just as it was a decade and a half ago when Social Media platforms were maturing.

Meta

Facebook/Meta CEO Mark Zuckerberg has called the Metaverse an “embodied internet … where with just a pair of glasses, you will be able to step beyond the physical world… beyond the limits of distance and physics” and engage in rich people-centred experiences.

A simulation of the Metaverse that Zuckerberg demonstrated last week showcased the potential of the platform. In the demo, a group of avatars met in a virtual room, played a hand of poker before being dazzled by a room-sized 3D artwork sent and paid for by A friend of Zuckerberg exploring New York (in real life).

For all the altruistic CEO-speak regarding the Company’s mission to “Bring people together”, Facebook/ Meta will still have to monetize the Metaverse experience. Conquering the next frontier may have to coincide with a new method for generating revenue for the Company.

 

How will Meta monetize the Metaverse?

A legitimate question that exists is; how will Meta monetize the Metaverse? A model based on highly targeted advertising is what has worked for Facebook in the past. Facebook has reported US $54 billion in revenue so far in 2021, setting the Company on a path for another record year. In contrast, Facebook has booked a comparably paltry US $1.2 billion in revenue in the same time frame from its non-advertising revenue streams, such as the sale of Oculus headsets.

FB Meta revenue

Zuckerberg has maintained that Facebook would always remain free to use. Fortunately, the Metaverse is not yet hamstrung to such a proclamation. Meta should be exposed to more revenue-generating opportunities including, subscription models, hardware sales, ticketing, skins, gaming and pay-to-play models, and SaaS. It might be fair to say there will be a universe of options for Meta to explore.

That’s not to say that Ads can’t be integrated with a metaverse, slotted tidily within the virtual landscape. Meta may even generate a more accurate understanding of their customer base through their metaverse experiences, boosting demand for its ads services as ads become hyper-targeted.

Q3 earning season is currently underway, and most high-profile companies are delivering revenue beats. Yet, Q3 revenue is not the only thing investors are watching. Investors are interested in revenue growth, customer acquisition, and pace of growth alongside the balance sheet. Inflationary and supply chain pressures that may affect the outlook of reporting companies are an additional concern for investors.

TESLA (NASDAQ: TSLA)

Reported: Wednesday, after trading
Revenue: $13.8 billion
Earnings per share: $1.86 profit per share (Non-GAAP)

Tesla's Q3, 2021 earnings were, once again, record-setting for the Company. The Company is increasing sales and has stated it is on track to "achieve 50% average annual growth in vehicle deliveries" at a time when chip shortages are hampering other automakers ability to do so. Improving gross margins (up to 30.5%) was also a significant factor in Tesla performance in Q3.

TSLA shares since earnings report:

Earnings Report TSLA

Netflix (NASDAQ: NFLX)

Reported: Tuesday, after trading
Revenue: $7.5 billion
Earnings per share: $3.19

The popularity of Netflix's series Squid Game hadn't completely filtered into the Company's finances at the time of its Q3, 2021 earnings report. Yet, Netflix delivered a favourable report, with revenue coming in on par and subscriber growth beating expectations. Squid Game IP is estimated to be worth $900 million to Netflix and should help boost its Q4 earnings, which typically get a seasonal bump anyway.

NFLX shares since earnings report:

Earnings Report NFLX

Johnson & Johnson (NYSE: JNJ)

Reported: Tuesday, before trading
Revenue: $23.3 billion
Earnings per share: $2.60

Johnson & Johnson's Q3 earnings-per-share beat expectations, with revenue climbing 10.7% from the previous corresponding period. J&J increased its (bottom-end) revenue guidance for the full year from $93.8 billion - $94.6 billion to $94.1 billion to $94.6 billion. J&J noted that its Covid vaccine would be responsible for $2.5 billion at years end and $502 million of its Q3 revenue.

JNJ shares since earnings report:

Earnings Report JNJ

Proctor and Gamble (NYSE: PG)

Reported: Tuesday, before trading
Revenue: $20.3 billion
Earnings per share: $1.61

PG beat revenue estimates, increasing sales revenue by 5% over the last quarter, but expects to fall short of 2020 revenue. The consumer goods Company also noted that rising producer costs, particularly as it relates to shipping and raw commodity prices, has already had and is going to continue to have a larger-than-anticipated effect on its earnings. In response, PG has begun raising the prices of some of its premium products as a quick remedy to help offset its rising costs.

PG shares since earnings report:

Earnings Report PG

Earning Seasons continues next week:

There are plenty more juicy earning reports due next week.

Facebook, after the bell Monday

Microsoft, Alphabet, Visa, Texas Instruments, and AMD, after the bell Tuesday

Thermo Fisher Scientific, Coca-Cola, McDonald's, and Boeing, before the bell Wednesday

Ford, after the bell Wednesday

Shopify, before the bell Thursday

 Apple, Amazon, and Starbucks after the bell Thursday

BABA

Alibaba is reporting its June Quarter results this Tuesday 03 August, in one of the most anticipated announcements of the week.

Alibaba’s announcement is hotly awaited due to several reasons, not least due to the turmoil surrounding the stocks of Chinese companies over the past two weeks. As has been widely reported, Chinese regulators have spooked investors and caused them to revaluate the risk status of Chinese equities or Chinese based companies.

Consequently, investors’ appetite for Chinese stocks has constricted, and stocks experienced a considerable sell-off. The new lower equity prices compensate for the premium that investors expect in response to the risk of investing in companies that can have the regulatory rug pulled from under them at the whim of a heavy-handed regularity/ government.

Alibaba was not immune from the recent slump in Chinese equities. BABA finished last week down 5.18%, but, to its credit, recovered from a 12.4% decline in stock price by Wednesday. An interesting note: in the past two months, BABA is making a habit of retracing by more than 50% after every significant descent.

Alibaba’s stock is down 6.36% since the last earnings report it delivered on 13 May 2021, and down 15.6% since the multi-month highs, it reached 28 June 2021 (intraday).

What to look forward to in this week’s earning report?

Alibaba bulls will be looking to break out of the channel the stock has traversed the past month and a half. Some significant factors present barriers to a breakout, but BABA is not without its positives, particularly related to the fundamentals of the business. If the fundamentals can overcome the obstacles, a share price above US$205 would be a confidence-inducing target, which could be an excellent start to a bullish run (and marks a 100% retracement from the last big dip).

Factors working against BABA

Alibaba and Cloud Computing

Beside the investments in its ecommerce platform paying off, investors will want to see Alibaba strengthen its position as the leader of the Chinese cloud service industry. As of 2021, the online giants foray into cloud computing has netted it ~7% of the global market share. However, Alibaba’s chance of usurping a great deal more of Microsoft or Amazons market share is unlikely. Moving forward, it will face more questions related to the security of its infrastructure and service from non-Chinese entities (much like Huawei and its bids for 5G contracts). This means, Alibaba’s global potential in the space is dubious but remains resilient in China. Although all is not lost, China’s SaaS industry is a minnow compared to the US (8x smaller) and thus has a much larger scope for growth than the US and other major economies.