Reports that Meta Platforms Inc (NASDAQ:META, ETR:FB2A, SWX:FB) has cancelled the development of a high-end virtual reality headset point to broader cost-cutting action in its Reality Labs division which is key to boosting sentiment towards the stock, analysts at Bank of America believe.
The Information reported that Meta has cancelled the headset, expected to launch in 2027 to rival Apple’s Vision Pro.
Per the report, which cited two Meta employees, staff in its Reality Labs division were told to stop working on the device following a product review meeting.
The company decided that, due to the sophisticated manufacturing process, it was too hard to keep the cost of the device at an attractive level for consumers.
“We think the new cut of headset is consistent with recent management's comments that Meta will only invest in where the company sees the greatest potential return,” the Bank of America analysts wrote in a note to clients.
The market may not be ready for this headset, the analysts wrote, noting that Meta’s recent vreitual reality hardware sales based on quarterly Reality Labs revenues has been below Street expectations.
Ongoing cost rationalization is significant
The analysts see ongoing cost rationalization at Reality Labs is significant for two reasons.
First, they believe it could help offset potential year-over-year margin declines in 2025 due to higher depreciation expenses by reducing headcount growth and hardware costs.
Second, if the market starts to discount Reality Labs' losses, the stock could see valuation upside, with a perceived cap on these losses potentially shifting focus to the core business earnings per share (EPS), which is approximately $6 higher than the current estimate that includes Reality Labs' losses.
The bank’s analysts repeated their ‘Buy’ rating on the stock and awarded it a $563 price target.
“We continue to see Meta as a top AI play in the consumer Internet sector, and the stock could see further upside from Reality Labs loss improvements and a potential TikTok ban,” they wrote.
Meta shares traded down 1.5% at $520 on Monday afternoon.