Facebook's metaverse project will help drive as much as 22% upside in the stock, Bank of America says

• Facebook stock holds 22% upside potential to $400, said Bank of America in a research note Tuesday.
• The company's investment in its metaverse project should contribute to long-term growth, the bank said.

Facebook's investment in building vast interconnected virtual spaces should contribute to driving the company's long-term growth and its stock price up by more than 20% from current levels, Bank of America said Tuesday.

The social-networking leader said Monday it will spend at least $10 billion in 2021 on its Reality Labs project, leading to a reduction of its overall operating profit this year. The project underpins Facebook's vision of a so-called metaverse, or a virtual world where people can work, shop, and meet with others who aren't in the same physical space.

The new disclosures on Facebook Reality Labs are "suggesting that core business profitability and EPS is quite strong," Bank of America research analyst Justin Post said in a note.

BofA raised its price target on Facebook to $400 a share from $385 and reiterated its buy rating. The stock has a 22% upside based on Monday's closing price of $328.69.

Late Monday, Facebook posted third-quarter earnings of $3.22 per share, higher than expectations of $3.19 per share, while revenue of $29 billion missed forecasts. The company also said it will start publishing financial results of Facebook Reality Labs as a separate unit. Shares were down 5% on Tuesday.

BofA said headwinds to Facebook's ad revenue from Apple's privacy changes are peaking, and under-monetized assets like Messenger, Watch, Marketplaces, WhatsApp could drive strong revenue growth in the next 3-5 years. Meanwhile, core business EPS may be higher than expected in 2022 despite heavy spending.

"Given massive investments which could total well over $50 billion before reaching breakeven, we think long-term holders will need to have a strong belief in Facebook's vision for the metaverse business model to want to hold the stock," said Post.

The metaverse is a "compelling" concept with a reasonable chance of mass-market adoption, in part as more than 5 million of the company's virtual reality headsets have already been sold, he said.

Post noted the risk to BofA's valuation framework is some may see the Reality Labs project as having a negative value due to huge investments.