Reports Meta Platforms Inc (NASDAQ:META, ETR:FB2A, SWX:FB) is cutting spending by its virtual and augmented reality division Reality Labs could boost sentiment towards the stock, analysts at the Bank of America believe.
It was reported by The Information on Thursday that the tech giant’s Metaverse division, a passion project of CEO Mark Zuckerberg, has been told to cut spending on hardware development by 20% by 2026.
Since the fourth quarter of 2020, the division has spent more than $50 billion, which balloons to closer to $100 billion when considering spending since acquiring Oculus in 2014.
“Given recent Reality Labs restructuring news, somewhere limited industry traction for VR devices, Meta’s unprecedented investment in a new consumer platform that is still very early, and a shifting focus toward AI, these potential cost cuts seem very logical to us,” the bank’s analysts wrote in a note to clients.
“Reality Labs cost rationalization (or at least a cap on losses) could increase investor focus on core business earnings per share (EPS) and valuation.”
Reality Labs’ costs are believed to be more than 50% on augmented reality glasses, close to 40% on virtual reality devices, and 10% on Horizon Worlds software.
The analysts forecast $18 billion in Reality Labs costs in 2024 and, as such, estimate cost rationalization could represent up to a $3 billion savings opportunity, or roughly $1 per share in after-tax EPS.
“However, we note that Meta and its peers are looking at higher AI-related depreciation costs in the future, so we are hesitant to cut expenses in our model at this point, as some of the cost savings could be reallocated to AI spend,” they wrote.
They repeated their ‘Buy’ rating on the stock and $550 price target, representing upside of about 15% from Meta’s current share price of $478.
“We continue to see Meta's core business as attractively valued at a 5-point discount to the S&P 500 despite much higher growth and a big AI opportunity ahead,” the analysts concluded.