Meta Platforms Inc. Plans to Cut Costs in Reality Labs by 20% to Focus on AI
Meta Platforms Inc. is set to reduce costs in its Reality Labs division by 20% by 2026, with a goal to save up to $3 billion. This move aligns with the company's strategic shift towards artificial intelligence (AI) and away from virtual reality (VR) devices, which have shown limited traction in the market. BofA Global Research has reiterated a "Buy" rating for Meta, emphasizing the company's attractive core business valuation at 15 times its 2025 earnings per share (EPS), excluding Reality Labs losses. The potential cost cuts are projected to increase Meta's EPS by $1 and may be reallocated towards AI investments. Despite the anticipated savings, BofA remains cautious, acknowledging the possibility of funds being redirected to AI, perceived as a significant growth area for Meta. The stock is currently valued at 20 times the 2025 GAAP EPS, but stands at just 15 times when the Reality Labs losses are excluded, portraying an appealing price for the core business. This strategic transition and cost rationalization could contribute to enhanced investor sentiment and a heightened focus on Meta's core business growth.
Key Takeaways
- Meta aims to slash Reality Labs hardware costs by 20% by 2026, resulting in a saving of $3 billion.
- BofA reiterates a "Buy" rating for Meta, valuing the core business at 15x 2025 EPS.
- Meta's pivot towards AI and cost reduction might strengthen investor attention on core growth.
- The cost reduction in Reality Labs could elevate the EPS by $1 and potentially redirect it towards AI investments.
- Despite the promising growth and AI prospects, Meta's core business is viewed as attractively priced.
Analysis
Meta's strategic shift from VR to AI, combined with the envisioned 20% cost reduction in Reality Labs, seeks to improve profitability and redirect investments. This move has the potential to bolster Meta's EPS by $1, with the possibility of reallocating funds into AI, an industry with robust growth potential. BofA's "Buy" rating underscores Meta's appealing core business valuation, despite the limited market presence of VR. In the short term, cost savings and AI ventures might enhance investor confidence, while in the long run, the focus on AI could diversify Meta's revenue streams and solidify its market position.
Did You Know?
- Reality Labs Division:
- Explanation: Reality Labs is a division within Meta Platforms Inc., formerly known as Facebook, dedicated to the development of virtual reality (VR) and augmented reality (AR) technologies. This includes hardware such as Oculus VR headsets and software for immersive experiences. The decision to reduce costs by 20% indicates a strategic shift in focus away from heavy investment in VR hardware towards other areas, especially artificial intelligence (AI).
- Earnings Per Share (EPS):
- Explanation: Earnings Per Share (EPS) is a financial metric that measures the amount of net income earned per share of outstanding stock. For Meta, the EPS excluding Reality Labs losses is crucial for evaluating core business performance, serving as a pivotal indicator for investors assessing the company's profitability and growth potential.
- GAAP EPS vs. Non-GAAP EPS:
- Explanation: GAAP (Generally Accepted Accounting Principles) EPS signifies earnings per share calculated based on standard accounting regulations. On the other hand, non-GAAP EPS excludes certain non-recurring or non-operational items, offering a clearer view of a company's ongoing operational performance. In the case of Meta, non-GAAP EPS excluding Reality Labs losses provides a better gauge of the core business's financial health and is often used by analysts for investment decisions.