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Facebook’s transition into Meta Platforms (NASDAQ:FB) and Mark Zuckerberg’s big push into the metaverse — the concept of a shared 3D virtual platform where people can socialize, work, and play — spurred a sector-wide move by tech companies to branch out into other areas like gaming.

The burgeoning gaming industry has transformed into a $198.4 billion sector in 2021, far exceeding the combined market size of the box office and the music industry, according to market research firm Mordor Intelligence.

Meta and VR gaming

Even before Meta announced its push into the metaverse in October 2021, the social media behemoth has built a presence in the gaming market with its acquisition of virtual reality company Oculus in 2014. Meta’s foray into the metaverse would make its Oculus VR headsets more appealing to the market amid strong competition against other VR headsets in the market like HTC’s (TPE:2498) HTC Vive and Sony’s (NYSE:SONY) PlayStation VR.

A sharper focus on gaming would encourage Facebook to double down on its investments in the gaming sector far beyond hardware and building a metaverse. The company, which also owns Instagram and WhatsApp, could soon build an army of tech talents that specialize in gaming.

Meta gobbles up gaming studios

In the months before it rebranded into Meta, Facebook went on an acquisition spree buying small gaming studios. Among its most recent acquisitions in the gaming space are studios Ready at Dawn, Unit 2 Games, VR firm BigBox VR, Downpour Interactive and Sanzaru Games.

However, Meta has yet to spend billions of dollars on a gaming company since its acquisition of Oculus in 2014 for $2 billion, raising the prospect of a potential acquisition of a larger gaming studio similar to recent moves by Sony, Microsoft (NASDAQ:MSFT) and Grand Theft Auto publisher Take-Two Interactive (NASDAQ:TTWO).

Multi-billion gaming deals

Three multi-billion dollar gaming deals welcomed the year in January, starting with Take-Two’s plans to buy mobile video game company Zynga for $12.7 billion, which was thought to be the gaming industry’s biggest acquisition on record until Microsoft announced that it is buying Activision Blizzard (NASDAQ:ATVI), the studio behind the Warcraft, Diablo, Overwatch and Call of Duty franchises, for $68.7 billion in cash.

Microsoft said the deal would make it the world’s third-largest gaming company in terms of revenue behind Tencent (HKG:0700) and Sony. Two weeks later, Sony said it is buying Bungie, the video game developer behind the Destiny and Halo franchises, for $3.6 billion.

Which gaming studio is Facebook eyeing?

With Meta’s intentions to promote the metaverse concept, industry watchers are now waiting for the company’s next big move. Meta will likely look to gobble up a gaming studio with a massive presence in the market such as France’s Ubisoft (OTCMKTS:UBSFY), the developer behind Assassin's Creed and Prince of Persia. Ubisoft CEO Yves Guillemot last month hinted that it is open to offers from companies.

Roblox (NYSE:RBLX), Playtika Holding (NASDAQ:PLTK) and Super League Gaming (NASDAQ:SLGG) are also likely targets if Meta chooses to snap up the bargains on these companies after their shares tumbled to near record lows recently.

In June 2021, Meta bought Unit 2 Games, the studio behind Roblox-like gaming platform Crayta.

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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.

It is hard to find a positive word about Facebook (NASDAQ FB), possibly for a good reason.

As the dominant social media platform, it has experienced its fair share of controversy and accusations of impropriety since its inception in 2004. Controversies that readily come to mind include misusing user data and helping bad-faith actors interfere with US elections. The latter accusation, may be a a little tenuous. Nonetheless, I'm firmly in the camp that believes that the world would be better off without the platform existing. It appears that Facebook's own research may back up this assertion, as revealed by data scientist and former Facebook Product Manager turned Whistleblower, Frances Haugen.

FB Stock

Facebook’s latest controversy

Haugen left Facebook in May 2021, but not before scanning thousands of pages worth of documents pertaining to internal research the Company had conducted. The research purports to acknowledge the harm that Facebook and its family of apps cause to its youngest user's mental health, in addition to its use in spreading misinformation (npr, 2021). This research was not openly disclosed.

Haugen spent Wednesday testifying in front of US congress and called for policymakers to consider regulating Facebook. Since 2018, Haugen argues, Facebook's algorithm has prioritised a newsfeed that is dangerous, inflammatory, and yields unhealthy side effects (nytimes, 2021).

It could be that Haugen's whistleblowing will strengthen policymakers' resolve to regulate Facebook.

Will the Securities and Exchange Commission get involved?

Haugen has filed eight whistleblower complaints with the Securities and Exchange Commission (SEC) (cbs, 2021). As a publicly listed Company, Facebook owes a duty of care to its investors to disclose information relevant to its performance. Arguably, the results of its internal research should have been disclosed, or at the very least, the Company should not be misleading the public about its progress to combat its harmful offshoots or omitting what its research shows to be true. This is what Haugen's expose has revealed to the SEC (cbs, 2021). If the SEC proceeds with opening a case in relation to Haugen's allegations, FB Stock may experience a material impact.

 

Did FB Stock shrug off another controversy?

FB Stock

On the day that the whistleblower story broke, Monday 4 October, FB stock fell 2.77%. Coincidently, Facebook and its family of apps experienced a 7-hour outage on the very same day that may have heightened investors’ concerns about the stock. Although, to put the 2.77% into perspective, it should be noted that FB Stock experienced very similar and frequent drops over the course September without any obvious causes.

By the close of Wednesday, at the time of writing, Facebook has almost clawed itself back to its Monday opening price. FB stock rose 1.33% on Tuesday and another 1.18% on Wednesday.

Another day, another set of earning reports.

Wednesday's focus is on McDonald's (NYSE: MCD), Facebook (NASDAQ: FB), Shopify (NYSE: SHOP), PayPal (NASDAQ: PYPL), and Spotify (NYSE: SPOT).

As these earning reports are coming in halfway through the week, it would be interesting to note each Company's stock price movements since Monday. Investors can be fickle, and last-minute adjustments may be seen in these trendy household names.

McDonald’s breaks out of its range in time for earning report

 

Investors have been upsizing their orders for McDonald's stock in the past week and a half. The price movement is in stark contrast to the ranging the stock has experienced since May. The price of MCD has grown from a 4-month low of US ~$226 up to an all-time high of US ~$246. In the two days of this week, investors are dieting, and the price growth has slowed. On Tuesday trading, McDonald's stock rose 0.99% and then an additional 0.11% in after-hours.

McDonald's is anticipated to report revenue of US $5.6B before the bell on Wednesday. Investors expect the Company to continue recovering its sales, a trend suggested in the Company's last quarterly report. There has been no indication that this might not be so. The only great barrier to the Company's recovery is the Delta variant of Covid spreading in America. Although, this concern is too recent to have likely interfered with McDonald's 2Q report.

Does Facebook have enough room to move upwards after a positive earning report?

FB 

Now, looking at Facebooks share price movement in the same calendar period as McDonald's paints a slightly different picture. Last week was kind to FB, with a 4% price jump occurring on the final day, closing the stock at US $374.88. Investors appear to believe that this last jump was a little too ambitious and has since retraced to US $367.80. Although, it is safely above the 23.6% Fib level.

At the close of Wednesday trading, Facebook is expected to report revenue of US $27.9B. Bear in mind, Facebook's peers have all beat their earnings forecasts this week and last, and the market would hardly be surprised if it were to follow suit. However, the positive news may not translate to a lift in share price. This is a misfortune that befell Apple on Tuesday after its earnings report came back exceedingly positive. In after-hours trading, APPL was trading down 2.1%. Perhaps FB slight retracement on Tuesday will mean there is room for growth if Facebook massively beats its estimate.

Will Shopify stick to brand and smash revenue estimates?

SHOP

Shopify has had a more dramatic retracement this week in the lead up to its earnings report. Falling from US $1,640 to US $1,553, or approximately 5.3%.

The stock price has found resistance around US $1,540 – 1,555 price several times in the past month and a half. The share price is, of course, currently just below the upper bound of this range.

Shopify has a custom of radically surpassing its estimated quarterly revenue. In its past four quarterly reports, SHOP has exceeded its estimated revenue by an average of 39%.

SHOP is likely to beat its estimates again in Q2, as several of the Company's cash-generating payment features start to carve out a more prominent presence on the Company balance sheet.

Coinbase listing on the Nasdaq: Boosting crypto's legitimacy and price

The largest Crypto exchange in the US, Coinbase, is preparing to join the Nasdaq this week. Coinbase is the first exchange to go public and the listing can be considered another big step toward the mainstream adoption of cryptocurrency. The listing day is Wednesday 14, and the Company could not have picked a better time. That is to say, Crypto prices are currently performing exquisitely.

The estimated valuation of Coinbase is as high as US$100 billion. A valuation this high would put the exchange on equal footing with Facebook when it listed back in 2012. Interestingly, Coinbase could catch up to Facebook’s current valuation of US$900 billion. This would be possible if the price of Bitcoin and Co. increases at the same miraculous rate experienced in 2013 and 2017.

Read the Full Story at fxstreet.com

Coinbase's imminent listing on the Nasdaq

Pullback in risk on – and that’s a good thing

De-risk! The market pulled back today on expensive tech stocks, overstretched valuations, with investors questions whether the stock market still has legs.

Broad Pullback

Steep valuations forcing a pullback

The FAANG stocks took the biggest hits as investors start to question their lofty valuations. Facebook and Apple are currently trading at 37 times price to earnings, with tech companies such as Salesforce and Zoom trading over 100 times their valuation. However, some consider this a healthy thing for the markets. Alec Young, chief investment officer at Tactical Alpha LLC, stated that “Frankly, the deeper the pullback in tech, the healthier it is for the overall market.” He further noted that the “market was overbought; too many people chased the tech names. It is all Healthy; the valuations have been stretched.”

U.S Dollar seeing gains on a pullback

The U.S dollar is set to record a weekly gain after a near ten-week downwards spiral for the greenback. However, with the Federal reserve continuing to pump liquidity into the markets, there are still plenty of headwinds against the U.S Dollar.

Take advantage of the pullback.

If you are an investor, try not to look at your investments to prevent any impulsive actions. Use this opportunity to buy your favorite stock for cheaper. Remember, this is a marathon, not a sprint.

Stock of the Week: Reliance Industries Limited (RELIANCE)

Nothing beats an old fashion conglomerate. Last week, we talked about the social media conglomerate we have all come to know on Facebook. However, the business we’re going to be talking about today dips its fingers into many industries. Reliance Industries Limited is an Indian multinational conglomerate with assets in Energy, petrochemicals, textiles, natural resources, retail, and telecommunications. They generated over $92 Billion in the past year, with their diversified investments into 5G and technology flourishing as their hard investments in oil and retail take a hit.

At the helm of the conglomerate is CEO, Mukesh Ambani, who owns almost 48% of the company. He is one of two sons of the founder of Reliance Industries, Dhirubhai Ambani. Mukesh has been CEO since 2003.

Reliance is up 40% year to date

Reliance Industries’ Catalysts:

Reliance has been taking full advantage of depressed prices due to the pandemic to shore up their balance sheet, raise capital, and invest in businesses. Amid the pandemic, Reliance turned net debt negative (cash on hand is more than debt needed to be serviced), raised $20 Billion from the likes of Google and Facebook by selling stakes in Jio, their telecommunications arm and has plans to use all that capital to invest into acquiring online retailers. Their telecommunications investments are starting to flourish, and with their healthy balance, excellent leadership, and further investments, they are poised to generate high returns for their shareholders in the future.

Reliance Industries’ Risks

They may be investing in tech-oriented businesses – however, this distracts from the fact that the other parts of the conglomerates are struggling. A $15 Billion oil deal with Saudi Aramco was put on hold after oil prices took a massive hit, alongside their retail and financial services segments also taking a beating due to the Coronavirus. Their tech assets may be flourishing. However, their other investments are not. Yet, the market has seen to discount the struggling parts of the businesses, with the stock price up 40% for the year. For reference, Facebook is up 25% year to date alongside beating earnings expectations. The market has put a premium on the excellent leadership and healthy balance sheet. However, we may see this reverse if the other parts of the conglomerate continue to show declining profits. The stock currently trades at around a 31 times earnings premium – something akin to a tech stock, which this is not.

Reliance Industries: Conclusion

An excellent example of a conglomerate adapting to the change in times (ahem. General Electric), Reliance Industries is an excellent company with exceptional leadership. What’s not so good is the price, which is quite expensive for a business with significant investments in non-performing sectors such as oil and financials. Investors may want to wait for a pullback before considering investing in the company.

Stock of the week: Facebook (FB)

We're trying something new here at Blackbull Markets! With MT5 on the Horizon, Blackbull Market clients will soon be able to have access to over 350 US stocks to trade. Hence, we're adding a new weekly article: Stock of the week! If you have any questions or have any stocks, in particular, you want us to cover in more detail, let us know.

Up 25.22% for the year. Current Stock Price: $261.30

Stock of the Week: Facebook (FB)

Facebook's Business:

We all know what Facebook is – however, broken down, they are a social media conglomerate comprised of their primary business Facebook with full ownership stakes in social media platforms Instagram and WhatsApp. All of their companies combined host 2.5 Billion users. To put that into perspective, there are an estimated 7.8 billion people on this planet, therefore their platforms host just under a third of the population.

Facebook, like many tech firms, generate revenue through selling advertising on their platforms. Last year, Facebook and its family of products generated $70.697 Billion in revenue, up from $55.838 Billion in 2018. Currently, founder Mark Zuckerberg is the CEO of the company.

Facebook's Catalysts:

Facebook, like many tech firms, are flush with cash and have high operating margins. Over the past two years, Facebook has had an average net operating margin of 40%. Due to the nature of the online business, it has held steady during the peak Coronavirus pandemic as everyone retreated to their homes, reliant on the internet.

Facebook currently gets the bulk of its advertising revenue from its main products, Facebook, and Facebook messenger. They have slowly introduced advertisements on Instagram; however, they have not monetized WhatsApp whatsoever. These two products alone, if monetized to their full potential, may provide a significant upside to their revenue and stock price. This is not to mention the other avenues they have stated to be perusing, such as Facebook Shops and dating.

Facebook's Risks:

Facebook have seen their fair share of scrutiny. From the Cambridge Analytica scandal in 2018 to the recent boycott in advertisers due to Mark Zuckerberg's relatively non-governance stance for news on Facebook. Events like these risks a decline in revenues if boycotts gain traction. However, a bulk of Facebook's income comes from small to medium-sized businesses, reliant on the 2.5 Billion active users to promote their goods or services. Therefore, these risks are quite low and should not post an immediate threat in the long run to the stock price.

Their stock is at an all-time high. Today, the stock sits at $261.08c, trading at a 33 times price-to-earnings multiple.

Tailwinds have come from the Coronavirus pandemic, forcing people to stay at home alongside the government having a negative stance on TikTok. Furthermore, they recently announced their TikTok competitor, Facebook reels. If President Donald Trump is successful in banning TikTok in the United States, this will be a massive tailwind for Facebook.

Facebook - Conclusion:

Facebook is likely poised to excel in the longer term, especially with Mark Zuckerberg at the company's helm. He has shown to have shareholders' interests at heart, mainly because he currently owns a 13.3% stake.

Fed keeps rates near zero, Tech CEOs testify

Fed's Chairman Jerome Powell has a clear message: They will not step off the gas when it regards stimulus. He stated in the previous Fed meeting, "We are not thinking about thinking about raising rates." Today? "We are not thinking about thinking about THINKING ABOUT raising rates." The Federal Reserve left rates unchanged, fluctuating from 0 to 0.25%.

NASDAQ in Blue, Gold in Orange, Dollar Index in Teal

Fed will continue to leave all support lines open, including bond-buying, low-interest rates, and dollar swaps for the foreseeable future. However, Chairman Powell states that the fed "[has not] looked at buying equities" and that they "[the fed] aims to ensure a strong recovery and to limit the damage." The Fed plans to keep on propping up the economy, no matter the implications/effects on the economy.

Jerome Powell also praised the banks stating they "have been a source of strength in this crisis" and that "banks are well-capitalized and strong." The conference drew minimal but expected moves from the market—gold slightly up while downwards pressure was placed on the dollar against major pairs. Equity markets edge sharply higher with the NASDAQ finishing at.

While the Fed battles with the Coronavirus, tech CEO's battle congress

While Chairman Powell spoke, a battle at Capitol hill (virtually) was ensuing against Congress and the CEO's of the 4 of the biggest tech companies: Google, Amazon, Facebook, and Apple. As they have grown to a collective market cap of just under 5 trillion dollars, they all have faced increased scrutiny regarding their market power and anti-trust issues. 

Mark Zuckerberg of Facebook on the top Left, Jeff Bezos of Amazon on the top right, Sundar Pichai of Google on the bottom left, Tim Cook of Apple on the bottom right

Amazon

CEO Jeff Bezos has been taking most of the brunt from congress as comments from the subcommittee grills him about anti-competitive practices on Amazon. With Bezos being the only CEO of the four that has not been to a congressional hearing, he has been relatively flustered with the questions, with Bloomberg Technology Reporter Spencer Soper stating that he is "clearly rattled, stammering quite a bit under tough questioning."

Facebook

It is not Mark Zuckerberg's first rodeo dealing with congress; he has testified previously, usually when Facebook attracts a lot of heat re: Cambridge Analytica scandal. He got scrutinized over their acquisition of Instagram, saying that they bullied the Instagram founders by showing them a product they were going to release called "Facebook Camera" if they did not sell the business to them. This continues with Snapchat, bullying CEO Even Speigel that he [Zuckrberg) would try to destroy the app if Speigel did not sell to Facebook. Mark Zuckerberg's response essentially states that Facebook copied a lot of competitors' features. 

Google

Google's CEO Sundar Pichai is fending questions regarding the grip Google has on their users' online lives as they control much of the Search, Email, Video, and Directions space. So far, Pichai has been the most defensive, using techniques to redirect questions and answering half questions. However, this seems to be enough for congress as they don't seem to be pushing hard on Pichai.

Apple

Apple's CEO Tim Cook got away with three and a half hours into the testimony, only being questioned about the App Store once. However, post recess, they continued to grill Cook about the accepting and rejecting of apps. However, it seems like congress is clutching on straws with no footing to substantiate the claim that Apple is engaging in unfair practices. They are struggling to shake Tim Cook. This is compared to Amazon's CEO Jeff Bezos, who has been repeatedly flustered with the questions thrown at him. 

 There is a lot of going on this week, which means a lot of volatility in the markets—trade safe, Trade Cautiously.

Tech Stocks: Growth turned Safe Haven?

Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?

NASDAQ vs SP500

Tech Stocks - Premiums finally justified?

To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years

FANG P/E Ratios

We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),

FANG Current vs Average P/E Ratios

They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?

FANG Net Profit Margins

FANG Cashflow (Billions)

Is that a tank or a Tech stocks’ balance sheet?

With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation. 

Not everyone is convinced in the Stock rally

PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”  

 Are you joining the tech stock rally?