What Meta’s Disappointing Earnings Mean For Tech Investors

Key takeaways

• On Wednesday, Facebook parent company Meta reported disappointing quarterly earnings and forecast higher expenses through 2023
• Meta stock plunged Thursday, shedding almost 24.6% to settle under $98 per share for the first time since 2016
• The reasons for the decline boil down to lower spend from advertisers and an increasingly expensive commitment to the metaverse

Facebook parent Meta saw its stock tumble Thursday following Meta’s earnings announcement Wednesday afternoon. By market close, Meta had plunged 24.6% in a single session and was selling under $98. The stock hasn’t traded this low since 2016.

So far this year, Meta’s stock has plummeted over 71%, more than doubling the tech-heavy Nasdaq’s 32% decline. Currently, the famed social media giant claims a net worth around $263.2 billion, well below its September 2021 $1 trillion-plus valuation.

Wedbush analyst Dan Ives summed up Meta’s disastrous report as “an absolute train wreck” indicating “pervasive digital advertising doldrums ahead” for Mark Zuckerberg’s brainchild. And Ives, like many of Meta’s investors, blames Meta’s performance on Zuckerberg’s latest obsession: the metaverse.

Meta earnings report: the bad and the ugly

Meta’s earnings report kicked off with disappointing quarterly numbers for the three-month period ending September 30:

• Revenue sunk 4% year-over-year to $27.7 billion against last year’s $29 billion and marked the company’s second straight quarterly decline
• Profits plummeted 52% YOY to $4.4 billion
• Meanwhile, spending soared 19%

The company’s metaverse division, Reality Labs, drove Meta’s losses, shedding $3.7 billion in the quarter compared to $2.6 billion lost in the year-ago quarter. All told, Reality Labs has lost some $9.4 billion in 2022 – and the year’s not over yet.

Looking forward, Meta indicated more of the same on the horizon. Management now expects total annual expenses to reach $85-87 billion, while fourth quarter revenue is pegged to reach the $30-32.5 billion range.

The company also expects its 2023 year to see total expenses climb at least $10 billion to reach the $96-101 billion range. Meta expects Reality Labs operating losses to contribute “significantly” to 2023’s increased spend.

A glimmer of light in Meta’s earnings

Meta’s earnings report isn’t pure doom-and-gloom.

For instance, the most recent quarter saw 2% more people spending time on Meta’s platforms, bringing monthly active user counts to 2.96 billion. Monthly, Meta saw 3.71 billion active users frequent the Facebook-Messenger-WhatsApp family.

Meta also earmarked Instagram’s latest achievement of surpassing two billion monthly active users. Management further reported that more people are spending time watching Reels, and implied that marketer ad spending for Reels topped $3 billion in annual revenue.

Said Meta founder and CEO Mark Zuckerberg, “Our community continues to grow and I’m pleased with the strong engagement we’re seeing driven by progress on our discovery engine and products like Reels. While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth. We’re approaching 2023 with a focus on prioritization and efficiency that will help us navigate the current environment and emerge an even stronger company.”

Challenges to overcome

These results from Meta cap off a particularly tumultuous year for the famed social media company. Following Facebook’s historic rebrand and subsequent interest in the metaverse (not to mention sky-high inflation), Meta has frozen most hiring, slashed budgets and reportedly prepared for layoffs.

But Zuckerberg’s metaverse dreams aren’t the only major source of declining revenue. One of the largest culprits remains a slowdown in digital advertising, sparked by high inflation and worries about declining consumer spending. In the most recent quarter, sales dropped 3.7%, fueling investor concerns.

Meta also contends that Apple’s iOS privacy update – which prevents third-party apps from tracking consumers across the web – will cost the company $10 billion this year alone.

Given the current state of the economy, Meta is far from the only internet-based firm suffering. Both Google and Snap recently saw their stocks take a hit 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 sink tens of billions into developing new, poorly-monetizable (for now) technologies while battling so many other headwinds.

Meta’s controversial solution: the metaverse

The metaverse – at least, what we believe the metaverse will be – doesn’t exist yet.

Essentially, it’s proposed to be an internet-based space where AI, augmented reality and virtual reality will provide humans with new experiences and heightened interconnectedness.

In many spaces – particularly among blockchain enthusiasts – Zuckerberg’s devotion to the metaverse is an exciting opportunity to develop the necessary technologies.

But among investors, this future of the internet remains controversial at best.

A year in

Last year to the month, Mark Zuckerberg announced his plans to change Facebook’s name to Meta as a symbol of the company’s devotion to bringing the metaverse to fruition. Since then, Meta has plowed billions into the emerging technologies required to bring the metaverse to life.

Unfortunately, these massive investments coincided with spiking inflation, hiking interest rates and the specter of depressed consumer spending.

As a result, skittish investors – wary of declining earnings – fled riskier assets for safer pastures. Those who stayed in stocks have become most cost-conscious, scrutinizing corporate earnings for signs of reckless spending.

And this week, that disastrous combination produced predictable results. Meta’s earnings have slumped this year, not just due to decreased ad spend, but because of its multi-billion-dollar investments into Reality Labs. In July, Meta posted its first sales decline in its history as a public company. Its stock is down over 71% this year.

In other words, it hasn’t been a good few months.

Zuckerberg has a plan

To combat these financial struggles, Meta announced in its earnings report that it plans to make “significant changes across the board.” While it will hold some teams flat, it plans to consider layoffs in underperforming departments and teams.

Noted Zuckerberg in Wednesday’s earnings call with investors, “The tougher prioritization and discipline and efficiency that we’re driving across the organization will help us navigate the current environment.”

However, Meta also plans to increase headcount in its “highest priority” departments – namely, those connected to the metaverse.

In the same call, Zuckerberg said that he’s “pretty confident this is going in a good direction…. I think that our work here is going to be of historic importance and create the foundation for an entirely new way that we will interact with each other and blend technology into our lives.”

What Meta’s earnings – and the metaverse – mean for you

Unfortunately for Meta, it appears that investors don’t feel the same 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 giant.

For investors, Meta’s investment represents a massive bet on technologies that only exist in pieces. While it’s likely that something like a cohesive metaverse will come about in the future, for the moment, its innovation, implementation and monetization remain clunky at best – and theoretical at worst.

In other words, it’s an expensive gamble that could take years – even decades – to pay off. While longer timelines are common in Silicon Valley, many in Wall Street prefer more tangible, short-term returns in their portfolios. To some, the company’s latest 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 get that a lot of people might disagree with this investment. But from what I can tell, I think this is going to be a very important thing and I think it would be a mistake for us to not focus on any of these areas, which I think are going to be fundamentally important to the future…. It’s just not clear, if we weren’t driving this forward that anyone else would be.”

Still, investors weren’t convinced. Brent Thill, an analyst on the Meta earnings call, noted that, “How investors are feeling right now is that there are just too many experimental bets versus proven bets in the core.”

As to what that investment means for stock prices and investors’ portfolios – well, Thursday’s price drop could be a solid indicator.

Don’t let short-term news run your portfolio

Whether Zuckerberg or someone else will actually usher in the era of the metaverse remains to be seen.

Regardless, we here are 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 their best shot at building true, lasting wealth.

That’s why we prefer buying into well-diversified Investment Kits instead of trading stocks based on future blips in the stock chart. With an AI-backed investment like Q.ai’s Emerging Tech Kit, you stand to profit off a diversified basket of tech-based market moves long-term, rather than short-term volatility.

That’s what we call smart investing.

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