Meta-profitability remains under pressure as virtual reality fails to translate into real-world outcomes

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Mark Zuckerberg’s Metaverse ambitions are still weighing on Meta Platforms FB’s results despite a string of job cuts as the company prepares to announce first-quarter results on Wednesday.

FactSet estimates the loss for the Reality Labs division at $3.19 billion, up 33% from the same period a year ago. The segment is seeing slow sales of its Quest headsets, which are used to deliver a virtual reality experience that will advance the company’s vision of the Metaverse, an immersive version of the web.

Overall, Wall Street analysts expect Meta’s net income to fall to $5.2 billion from $7.5 billion in the first quarter of 2022 as revenue rose 1% to $27.6 billion -dollar declines. Earnings per share are expected to be $2.02, down 26% year over year. Still, investors are willing to pay multiples of 23.7 times forward annual earnings to own the company’s shares, the highest since late 2021.

Because the company’s virtual reality kits sell at deep discounts, sometimes as much as 25% for the $1,500 Quest Pro, Rocco Strauss, senior analyst at Arete Research, too high in London.

There are some reasons for optimism, including a recovery in post-pandemic ad revenue and an expected turnaround to profitability at Reels, Meta’s short video content platform. A potential US ban on rival TikTok could bode well for Meta, as its Instagram unit takes up as much as 75% of the current advertising budget spent on the Beijing-based company’s ads, according to an analyst note from Vancouver investment bank Canaccord Genuity from April 17 .

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A Monday statement from the same company expects Reels to be revenue neutral by the end of the year.

The Family of Apps division, home of Instagram — which also owns Reels — Facebook and WhatsApp, is expected to post $10.4 billion in revenue this year, down 9.5% from 2022. A recovery in two hours could help cushion the blow from Reality Labs’ losses.

That said, Strauss will look at Meta’s own comment on Reels monetization. “Meta is evolving into a structurally lower-margin business, with Reels increasing its share of time spent,” he said in an emailed statement. Regardless of how much ad money Reels can pick up from TikTok, Meta’s current rebates to boost ad spend and “to attract more experimental budgets to Reels” are unfavorable on the cost side, he adds.

The string of layoffs has boosted confidence as Meta delivers on the “Year of Efficiency” promise made during its Q4 2022 earnings call. Meta announced in March that it would lay off 10,000 employees, reducing its headcount by about 21,000 to 66,000 since September.

About 4,000 Meta employees were laid off on April 19 in the first round of the last 10,000 job cuts announced in March. While Meta didn’t reveal how many employees from each department were affected, some gaming developers from Reality Labs were among them.

When the first round of job cuts was announced in November, investors approved the move, and Meta’s shares have more than doubled since then. But Strauss von Arete is skeptical: “Meta would certainly not lay off staff if sales explode or the company assumes an enormous reacceleration in the second half of 2023.”