Microsoft (NASDAQ:MSFT) has recently seen its shares moving in the right direction after stumbling to start 2022. All it took was a stellar earnings report on Jan. 25 for MSFT stock to put together an impressive rally. One of the factors behind the optimism has been the company’s very public embrace of the metaverse.
The next-big thing in the tech world has huge potential and Microsoft isn’t the only company that’s making bets on it. The interest in all things metaverse ended up producing a head-scratcher for Microsoft watchers last week, though. There were rumors that the company had given up on HoloLens — the AR headset it has been working on for years.
If true, what message does abandoning an AR headset send to investors who are adding MSFT stock to their portfolios specifically for its metaverse potential?
MSFT Stock and the Mixed Messages on the Metaverse
Most of what we’ve been hearing coming out of Redmond has been good stuff. However, last week there was a big question mark around the company’s metaverse strategy. When the company confirmed it was spending $68.7 billion to buy Activision Blizzard (NASDAQ:ATVI) in January, there were two reasons given for the purchase: gaming and the metaverse. In a blog post announcing the planned acquisition, Microsoft CEO Satya Nadella stated: “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”
However, rumors began to surface last week that the company had canceled its HoloLens 3 augmented reality (AR) headset. Microsoft has been working on the HoloLens for the better part of a decade. The company released a second generation HoloLens 2 in 2019. At that time, it steered the AR headset toward the commercial market instead of consumer use. In 2021, it announced a deal to supply the U.S. Army with 120,000 custom, ruggedized HoloLens headsets. The 10-year contract could be worth nearly $22 billion.
That deal vaulted HoloLens from a fringe product to something that could have a material impact on MSFT stock value. The sudden rise of the metaverse concept only adds to the HoloLens potential.
So, what to make of the rumors from last week that Microsoft had cancelled the HoloLens 3? If true, that shouldn’t have an impact on its Army contract (although there have been rumors of quality control and performance issues there). However, it does raise questions about Microsoft’s metaverse strategy.
We’ll have to see how this one plays out. On one hand, the Microsoft executive in charge of HoloLens says all is well. On the other, dozens of employees have reportedly left the team over the past year, many apparently seeking out metaverse-related jobs with other companies.
Microsoft Has Better Ways to Make Metaverse Money
Regardless of what happens with the HoloLens, Microsoft has better ways to make money in the metaverse.
Hardware to make the AR part of the metaverse come alive is just one component. What every metaverse instance needs is cloud servers. It doesn’t matter whose metaverse version you end up being part of, it’s all in the cloud. And when it comes to the cloud, Microsoft’s Azure holds a solid second-place spot, globally. In the company’s most recent quarter, Microsoft’s cloud revenue hit $22.1 billion — up 32% year-over-year.
In addition, metaverse participants will be looking for content above all else. That Activision acquisition is going to pay off for Microsoft there.
Ultimately, there’s a reason why Microsoft has a market cap of over $2 trillion, while PC makers and gaming accessory makers are worth a small fraction of that amount. The big money isn’t in the hardware to interact with an online game or experience, it’s in the software and the infrastructure that makes it all possible. The same will hold true with the metaverse. That will leave Microsoft sitting pretty as adoption ramps up, with MSFT stock reflecting the company’s central role.
Bottom Line on MSFT Stock
MSFT stock currently earns a “B” rating in Portfolio Grader. That indicates a stock that has pretty solid long-term growth prospects.
Microsoft has not officially confirmed cancellation of HoloLens 3. If the company does end up giving its AR headset the axe, it’s because something about the approach no longer makes sense. Remember, the first HoloLens was demonstrated in 2015. That was long before the tech industry glommed onto the “metaverse” concept. Maybe it’s time to start over. Maybe it makes more sense to let hardware partners run with it instead.
Microsoft may end up being late to the party, or missing the boat altogether when it comes to consumer AR headsets. That’s okay. The company’s prominent position in the metaverse infrastructure and content is going to provide plenty of opportunity. Not to mention its other lines of business like Windows, Office and Xbox gaming. The bottom line is that there is nothing to panic about here.
With MSFT still down nearly 9% since the start of the year and analysts projecting the company is marching toward a $3 trillion market cap, now might be the time to make a move.
On the date of publication, Louis Navellier had a long position in MSFT. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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