Metaverse Bet Weighs Heavily on Meta's Profit

Facebook parent Meta saw almost $80 billion shaved off its market cap in early trading on Thursday after reporting an alarming 52-percent drop in profits for the third quarter. Aside from weakness in its advertising business, which fueled the second consecutive year-over-year drop in revenue, the earnings decline can mainly be attributed to Meta throwing money at its metaverse vision.

In the first nine month of 2022, the company’s Reality Labs division, i.e. all things metaverse, lost $9.4 billion, adding to a hefty $10-billion tab in 2021. As our chart shows, Meta’s operating margin was cut in half over the past two years, as the company’s bet on the next big thing is weighing heavily on its short-term results. Making things worse for shareholders, Meta warned that it expects Reality Labs' operating losses to “grow significantly” in 2023, all while a further slowdown in advertising sales looks likely given the state of the global economy. Despite efforts to cut costs and limit headcount growth, the company expects its total expenses to grow by 13 to 16 percent to $96 to $101 billion next year, which is "the wrong number at the wrong time for investors," according to Deutsche Bank analyst Benjamin Black.

Judging by Meta’s latest stock market run, investors aren’t yet convinced that Zuckerberg's latest idea really has legs. And while laying the groundwork for the next computing platform requires money and patience, Wall Street appears unwilling to give Meta either at the moment. The company's share price was down more than 20 percent on Thursday morning in a clear vote of no confidence.