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Metaverse Punt Not Paying Off Yet for Business Formerly Known as Facebook

3 mins
Updated by Geraint Price
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In Brief

  • Meta Platforms’ latest financial results suggest the company is struggling with its pivot to the metaverse.
  • The company realized an annual $9.4 billion in operating losses for its metaverse unit, Reality Labs.
  • Despite calls to rein in metaverse spending, chief executive Mark Zuckerberg is determined to follow through.
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Meta Platforms’ latest earning report shows that the company’s bet on the metaverse has yet to pay off.

The fundamentals of Meta’s third quarter earnings report do not inspire confidence in the company’s recent operations. Despite earning $27.7 billion in revenue, this figure is down 4% from the same period in 2021.

This decline is compounded when accounting for expenses, which rose nearly 20% compared to Q3 2021. Altogether this resulted in a whopping 52% drop in net income, to $4.4 billion from $9.2 billion last year.

Although shares of Meta had risen to roughly $140, these gains quickly evaporated some 25% in after hours trading.

Reality Check for Reality Labs

Meta’s disappointing third quarter results can largely be attributed to its spending on Reality Labs. The operating loss of the unit responsible for the company’s virtual and augmented reality projects amounted to $3.7 billion.

This figure is up from $2.8 billion the previous quarter, totaling at $9.4 billion for the year. Meanwhile, Reality Labs only generated $285 million in revenue, down from $558 million the year prior.

Yet, executives at Meta Platforms were not entirely surprised by the negative results. In fact, the company’s outgoing chief financial officer Dave Whener said the trend would likely continue.

In the latest quarterly report, he said the company expected Reality Labs’ operating losses to “grow significantly year-over-year,” in 2023.

After that, however, the company intends to “pace Reality Labs investments,” in order to continue growing operating income long-term.

Zuck’s Meta Metaverse Conviction Undimmed

In spite of the losses, chief executive Mark Zuckerberg also singled out achievements Meta experienced over the preceding quarter. For instance, a pair of the company’s most popular applications reportedly achieved new milestones. 

The amount of active users on its photo-sharing app Instagram reached 2 billion on a monthly basis. In addition, Meta’s encrypted messaging app WhatsApp managed to achieve this same figure on a daily basis.

In an effort to compete with rival viral apps, Zuckerberg said the company would place a greater emphasis on having recommendations drive users’ feeds. He described this potential shift in the company’s services as being more of a “discovery engine.”

However, Zuckerberg remains resolute about the company’s metaverse ambitions, saying that investing in “the next computing platform” was still a top priority.

He believes the development of the metaverse “to be of historic importance,” adding it could ultimately result in a paradigm shift in how society interacts with one another.

Indeed, Zuckerberg had already achieved this with the creation and mainstream adoption of the world’s largest social network, Facebook.

Investor Doubts Begin to Surface

But while Zuckerberg remains confident, the chorus of doubters grows increasingly louder. One analyst equated Zuckerberg’s metaverse convictions with Jack’s belief in magic beans, doubting prospective results from a “metaverse beanstalk.”

One of the loudest voices of disapproval came from one of the most prominent shareholders in the company. In an open letter, Brad Gerstner of Altimeter Capital said Meta needed to come to terms with a changed financial environment. 

Although Gerstner expressed his steadfast confidence in Zuckerberg, he proffered several solutions himself. First, he recommended shedding staff, which Zuckerberg admitted the company would do over the next year.

Ultimately though, Gerstner said the company needed to limit its annual investment in Reality Labs to $5 billion. In this last point, Zuckerberg seems unlikely to relent.

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Nicholas Pongratz
Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.
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