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The central theses
- On Wednesday, Facebook parent company Meta reported disappointing quarterly results and forecast higher spending through 2023
- Meta shares plummeted Thursday, shedding nearly 24.6% to settle below $98 a share for the first time since 2016
- Reasons for the decline can be attributed to lower spend by advertisers and increasingly expensive engagement with the Metaverse
Facebook parent company Meta saw its share price fall on Thursday after Meta’s earnings announcement on Wednesday afternoon. By the close, Meta was down 24.6% in a single session, selling below $98. The stock hasn’t traded this low since 2016.
So far this year, Meta’s stock is down over 71%, more than doubling the tech-heavy Nasdaq’s 32% decline. Currently, the famed social media giant claims a net worth of around $263.2 billion, well below its September 2021 valuation of over $1 trillion.
Wedbush analyst Dan Ives summed up Meta’s disastrous report as “an absolute train wreck,” suggesting that Mark Zuckerberg’s idea is “ahead of pervasive digital advertising doldrums.” And Ives, like many of Meta’s investors, blames Zuckerberg’s latest obsession for Meta’s achievement: the Metaverse.
Meta Results Report: the bad and the ugly
Meta’s earnings report began with disappointing quarterly earnings for the three-month period ended September 30:
- Revenue fell 4% year over year to $27.7 billion from $29 billion a year earlier, marking the company’s second straight quarterly decline
- Profits plummeted 52% year over year to $4.4 billion
- Meanwhile, spending rose 19%
The company’s Metaverse division, Reality Labs, contributed to Meta’s losses, losing $3.7 billion in the quarter compared to a $2.6 billion loss in the year-ago quarter. All in all, Reality Labs lost about $9.4 billion in 2022 — and the year isn’t over yet.
Looking ahead, Meta hinted at more of the same on the horizon. Management now expects total annual spend to be $85 billion to $87 billion, while fourth-quarter revenue is expected to reach $30 billion to $32.5 billion.
The company also expects total spending to increase by at least $10 billion in 2023 to reach the $96 billion to $101 billion range. Meta expects Reality Labs’ operating losses to contribute “significantly” to increased spending in 2023.
A glimmer of light in Meta’s income
Meta’s earnings report isn’t just a doomsday spectacle.
For example, last quarter, 2% more people spent time on Meta’s platforms, taking its monthly active users to 2.96 billion. Monthly, Meta recorded 3.71 billion active users visiting the Facebook Messenger WhatsApp family.
Meta also envisioned Instagram’s recent achievement surpassing two billion monthly active users. Management went on to report that more people are spending time watching Reels and implied that marketers’ ad spend on Reels hit over $3 billion in annual revenue.
Mark Zuckerberg, Founder and CEO of Meta, said, “Our community continues to grow and I’m pleased with the strong engagement we’re seeing, driven by advancements in our search engine and products like Reels. While we face near-term revenue challenges, the foundations are in place for a return to stronger revenue growth. We approach 2023 with a focus on prioritization and efficiency that will help us navigate the current environment and become an even stronger company.”
to overcome challenges
These results from Meta cap a particularly tumultuous year for the famed social media company. After Facebook’s historic rebrand and subsequent interest in the Metaverse (not to mention skyrocketing inflation), Meta froze most hires, slashed budgets and reportedly braced for layoffs.
But Zuckerberg’s Metaverse dreams aren’t the only major source of declining earnings. One of the biggest culprits remains a slowdown in digital advertising, triggered by high inflation and concerns about falling consumer spending. In its most recent quarter, sales fell 3.7%, fueling investor concerns.
Meta also claims that Apple’s privacy update for iOS — which blocks third-party apps from tracking consumers across the web — will cost the company $10 billion this year alone.
Given the current economic climate, Meta is far from the only internet-based company suffering. Both Google and Snap recently saw their shares plummet after reporting similarly disappointing results. Meanwhile, Microsoft reported some of its worst numbers in half a decade.
However, none of these companies are preparing to pour tens of billions into developing new, (for now) poorly monetizable technology while battling so many other headwinds.
Meta’s controversial solution: the Metaverse
The Metaverse – at least what we think the Metaverse will be – does not yet exist.
In essence, it is intended to be an internet-based space in which AI, augmented reality and virtual reality enable people to experience new things and become more connected.
In many areas – especially among blockchain enthusiasts – Zuckerberg’s dedication to the metaverse is an exciting opportunity to develop the necessary technologies.
But among investors, that future of the internet remains controversial at best.
A year in
To the month last year, Mark Zuckerberg announced his plans to change the name from Facebook to Meta as a symbol of the company’s dedication to making the Metaverse a reality. Since then, Meta has poured billions into the new technologies needed to bring the Metaverse to life.
Unfortunately, this massive investment coincided with rising inflation, rising interest rates, and the specter of low consumer spending.
As a result, timid investors – wary of falling returns – fled riskier assets for safer havens. Those who have stuck with stocks have become extremely cost-conscious, and are scrutinizing corporate earnings for signs of reckless spending.
And this week, that disastrous combination produced predictable results. Meta’s revenue has plummeted this year, not only due to lower advertising spend, but also due to its multi-billion dollar investments in reality labs. In July, Meta recorded the first drop in sales in its history as a public company. The stock is down over 71% this year.
In other words, these were not good months.
Zuckerberg has a plan
To combat these financial woes, Meta announced in its earnings report that it plans to make “substantial changes across the board.” While it will flatten some teams, it plans to consider layoffs in underperforming departments and teams.
Zuckerberg noted on Wednesday’s conference call with investors, “The more rigorous prioritization, discipline and efficiency that we are driving across the business will help us navigate the current environment.”
However, Meta also plans to increase the number of employees in its “top priority” departments – namely those connected to the Metaverse.
In the same conference call, Zuckerberg said he was “pretty confident this is going in a good direction… I think our work here will be historic and will lay the foundation for a whole new way in which we interact with each other and integrate technology into our lives.”
What Meta revenue—and the Metaverse—means for you
Unfortunately for Meta, it seems investors don’t feel that way about the Metaverse.
For Zuckerberg, the Metaverse is the next logical step for Facebook; an opportunity to transform the social media site into a virtual reality behemoth.
For investors, Meta’s investment represents a massive bet on technologies that exist only in parts. While it’s likely that something of a coherent metaverse will emerge in the future, for now, its innovation, implementation, and monetization remain cumbersome at best – and theoretical at worst.
In other words, it’s an expensive venture that can take years — even decades — to pay off. While longer durations are common in Silicon Valley, many on Wall Street prefer more tangible, shorter-term yields in their portfolios. For some, the company’s recent financial woes serve as confirmation of their skepticism about Meta’s bet.
Zuckerberg addressed some of those concerns in Wednesday’s earnings call, saying, “Look, I understand that a lot of people might not agree with this investment. But as far as I can tell, I think this is going to be a very important thing, and I think it would be a mistake if we didn’t focus on one of those areas that I think will be important for the future of will be of fundamental importance … . It’s just not clear if we didn’t push this, someone else would.”
Still, investors weren’t convinced. Brent Thill, an analyst at the Meta earnings call, noted, “Investors feel right now that there are just too many experimental bets versus tried and true core bets.”
As for what this investment means for stock prices and investors’ portfolios, well, Thursday’s decline could be a solid indicator.
Don’t let short-term news drive your portfolio
Whether Zuckerberg or anyone else will actually usher in the Metaverse era remains to be seen.
Regardless, we here, Q.ai, believe that acting on short-term news within a long-term strategy is often a mistake. Historically, a long-term buy-and-hold investment strategy offers most investors the best opportunity to build true, lasting wealth.
For this reason, we prefer to buy into well-diversified investment kits rather than trade stocks based on future stock chart blips. With an AI-enabled investment like Q.ai’s Emerging Tech Kit, you benefit from a diversified basket of technology-based market movements over the long term, rather than short-term volatility.
This is what we call smart investing.
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