Investors swiped more than $65 billion from Meta’s market cap on Wednesday after the Facebook owner reported another quarter of declining revenue and failed to convince investors big bets on the Metaverse and artificial intelligence were paying off.
Meta’s shares fell 19 percent in after-hours trading as the world’s largest social media platform joined other big tech groups in warning that an economic slowdown would hit its advertising businesses as brands spend less on marketing would.
In addition to broader macroeconomic woes, Meta faces a number of challenges, including increasing competition for its Instagram platform from rivals like short-form video app TikTok, and difficulties in targeting and measuring advertising due to changes in Apple’s privacy policy.
The company said it expects revenue of between $30 billion and $32.5 billion in the current quarter, compared to analysts’ expectations of $32.2 billion.
According to S&P Capital IQ, third-quarter net income fell 52 percent to $4.4 billion, below consensus estimates of $5 billion. Meanwhile, revenue fell 4 percent to $27.71 billion, the slowest pace of growth since its IPO in 2012, after a 1 percent decline in the most recent quarter. That was slightly better than analysts’ estimates for a 5 percent decline.
Mark Zuckerberg, Meta’s founder and CEO, warned the company of “near-term revenue challenges,” but said that “the foundations are in place for a return to stronger revenue growth.”
Speaking to analysts, he doubled down on his biggest bets, including developing a short-form video format that can compete with TikTok, business messaging, and the Metaverse. He tried to reassure investors that investing in these areas would pay off in the long run.
“I appreciate the patience and I think those who are patient and invest in us will be rewarded in the end,” he said, arguing that the company did “leading work” on the Metaverse that would be “of historical importance.” .
Meta’s disappointing gains came amid a broader sell-off in major tech stocks. Shares of Google parent Alphabet fell more than 9 percent on Wednesday after it reported a sharper-than-expected slowdown in its core search ads business, while Snap’s stock tumbled last week after posting the slowest pace of growth since its IPO in 2017 would have.
Meta, which rapidly increased headcount during the pandemic, came under scrutiny from investors for spending heavily on Zuckerberg’s vision of building a world of digital avatars known as the Metaverse. As with other virtual and augmented reality projects Meta is working on, it is expected that this will not yield a return on investment for many years.
Third-quarter revenue at Reality Labs, its Metaverse unit, nearly halved to $285 million while losses were $3.7 billion, compared to $2.6 billion a year ago. The company said it expects operating losses at the unit to “increase significantly year-on-year” in 2023.
“Meta is on shaky ground in terms of the current business position,” said Debra Aho Williamson, an analyst at Insider Intelligence. “Zuckerberg’s decision to focus his company on the future promise of the metaverse diverted his attention from the unfortunate realities of today.”
The company estimated total spending for 2022 at $85 billion to $87 billion, down from its previous guidance of $85 billion to $88 billion. However, it expected to spend between $96 billion and $101 billion in 2023, despite recent attempts to cut costs and freeze most hires.
The company said it was making “significant changes across the board to operate more efficiently” and had “taken a closer look at all areas of operational costs.”
But it warned “these movements . . . will take time to catch on” and that some attempts to find savings, such as downsizing office space as more employees work from home, would result in “additional costs in the short term”.
Zuckerberg told analysts that investing in its artificial intelligence capabilities helped boost capital spending, but that the technology would help increase views of its short-form video format, for example.
Analysts also raised concerns about rising spending. “To sum up how investors feel right now, there’s just too much experimental bets versus proven bets on the core,” said Brent Thill, an analyst at Jefferies.
