Meta Platforms (NASDAQ:META) stock just got an interesting bit of news. The Wall Street Journal reported Meta was in talks to acquire a minority stake in EssilorLuxottica (OTCMKTS:ESLOY), the parent of Ray-Ban sunglasses. Meta Platforms stock could benefit from the deal.
For those unfamiliar with the 1983 movie Risky Business, Tom Cruise’s character wore a pair of Ray-Bans that helped revive the iconic brand. Now owned by EssilorLuxottica, Meta is interested in acquiring 5% of the Paris-based 88 billion euros ($96.0 billion) market cap.
In a move straight out of Hollywood, Mark Zuckerberg is looking to pay $5 billion for the minority position. Is this a case of vanity or is there more to the billionaire’s latest idea?
EssilorLuxottica is already working with Meta on its smart glasses so the move might not be so crazy after all.
Here’s why.
Wearable AI Is the Way
The one thing that excites me about the idea of wearable AI is that I find Apple Watches too small to use regularly. As for iPhones, they’re fine for looking for information, but if you’ve ever seen someone walking and reading it’s a recipe for disaster.
The Ray-Ban Meta glasses provide users the opportunity to use Meta’s AI assistant to process information on the go.
“The latest version of the glasses allows users to livestream what they see directly on to Facebook and Instagram. In the U.S., the glasses are integrated with Meta’s artificial intelligence assistant, giving owners the ability to ask the glasses for more information about what is in front of them,” stated the Financial Times.
One of the few tech companies that’s been able to crossover from tech nerds to mainstream consumers is Apple (NASDAQ:AAPL). That’s precisely who Meta’s up against in the race for wearable AI.
I don’t think these companies are doing anything wrong by pushing wearable AI. It makes sense given the mobile world we live in.
Hooking up with EssilorLuxottica, a company that knows so much about eyewear design, is a smart move if that’s where Zuckerberg wants to take the AR/VR side of its business.
$5 Billion Is Petty Cash for Meta
Meta Platforms stock benefits from having serious cash flow. The company generated $12.53 billion in Q1 free cash flow, almost double a year ago. The company’s investment in EssilorLuxottica would be 40% of one quarter’s free cash flow. It’s a drop in the bucket for Zuckerberg and company.
And the best part is it will have little bearing on the successful operation of the business in the months and years ahead. It’s small enough to do little to the business’s liquidity, but not quite large enough to upset institutional investors.
For example, Meta bought back $14.64 billion of its stock in the first quarter although its shares gained 304% between Dec. 31, 2022, and March 31. That’s a much worse use of capital if you believe in share repurchases that respect intrinsic value.
Further, compared to the $19 billion it spent to acquire WhatsApp in 2014, the potential $5 billion expenditure is much less taxing on today’s business than its 2014 investment. Fortunately, it turned out to be a wise investment.
This one should too.
The Dividends Will Help Meta Platforms Stock
In June, EssilorLuxottica paid an annual dividend of 3.95 euros ($4.30) a share. That was 22% higher than a year earlier. In June 2021, it was $1.08. It’s grown more than 3x in three years. Assuming its business remains the same, it will pay 4.82 euros ($5.25) a share next June.
The company had 457.3 million shares outstanding as of June 30. Assuming a 5% bump for Meta Platforms stock to 481.4 million, Meta’s 24.1 million shares would generate nearly $127 million next June.
If it were to hold the shares over the next decade, regardless of what its partnership with EssilorLuxottica actually achieves, it would generate well over $1.27 billion in dividends.
Over the past five years, its shares have generated a mediocre 62% return. If it repeats this lackluster effort over the next two five-year periods, it would turn the $5 billion into $13.12 billion in a decade, generating an overall profit of $9.39 billion.
Calculation: [$5 billion * 1.62 = $8.1 billion * 1.62 = $13.12 billion plus $1.27 billion = $14.39 billion less $5 billion = $9.39 billion]
It’s a no-brainer.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.