Meta just dropped a metaverse bomb on investors. Here's what you need to know

Meta's results just keep getting worse.

| More on:
A young woman looks at something on her laptop, wondering what will come next.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Meta Platforms' (NASDAQ: META) metaverse is going in reverse. The Facebook parent issued a stinker of an earnings report Wednesday, missing expectations on nearly every key metric and offering disappointing guidance.

Meta stock plunged on the third-quarter results, falling 20% in after-hours trading, and it's clear why. Overall, the results show a company whose once-dominant advertising business is fading, while it pursues what increasingly looks like a boondoggle in the metaverse. Revenue from Reality Labs, its metaverse-focused division, plunged in the quarter, and the company said losses in the segment would significantly widen next year. 

A reality check for Meta

Revenue from Reality Labs fell 51% to $285 million, which was the company's lowest revenue from the metaverse business in at least eight quarters. Reality Labs also reported an operating loss of $3.7 billion in the quarter, its biggest quarterly loss ever in the segment. Through the first three quarters of the year, the division has lost $9.4 billion.

At this stage, Reality Labs' revenue is made up entirely of Quest headset sales, and management said sales of Quest 2 were down from the quarter a year ago.

The company just began shipping its high-end mixed-reality headset, Quest Pro, which is priced at $1,500, and it plans to roll out the Quest 3 next year, which is expected to sell for between $300 and $500.

If you give Meta the benefit of the doubt, you might assume that the revenue decline in Reality Labs came because potential buyers were waiting for newer Quest models to come out, but the company's early forecast for 2023 wasn't inspiring either. Management anticipates that Reality Labs' operating loss will grow significantly in 2023, and didn't offer any indication it expected a substantial increase in revenue. 

It's hard to understate how colossal the metaverse division's losses are already, at an annual run rate of $15 billion after the third quarter. Only a few dozen U.S. businesses make that much in profit in a typical year, meaning almost no other company could afford to make a bet so expensive and risky.

The fact that Meta is willing to spend that much on an unproven concept might signal the company's confidence in the metaverse as the next major computing platform, as CEO Mark Zuckerberg has previously described it. However, that confidence could just as easily be misplaced, making Reality Labs a gargantuan folly that never becomes a viable business.

How to lose $500 billion in 10 months

Few companies, if any, have invested this much in a development-stage business before, and the bonfire in Reality Labs is one reason why Meta's stock is now down more than 60% this year, wiping off more than $500 billion from its market cap.

The other reason is the challenges in its advertising business, but Meta deserves a pass in that segment, as the two biggest headwinds there -- Apple's ad tracking transparency initiative and the macroeconomic slowdown -- are outside its control, and it has now lapped the worst of Apple's ad targeting restrictions.

The metaverse bet, on the other hand, Meta owns entirely, and the prospect of running an operating loss around $20 billion in Reality Labs next year is surely frightening to many of its investors. 

Management said that after 2023 it would manage its investments in Reality Labs to grow overall operating income, but that growth will come off of a much smaller base than the company had last year.

Advertising will remain the company's profit engine for the foreseeable future, but the stock's future will be determined by what the company achieves in the metaverse. If Reality Labs doesn't live up to Zuckerberg's ambitions, Meta's best days are likely behind it. 

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman has positions in Meta Platforms, Inc. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Apple and Meta Platforms, Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

electric vehicle such as Tesla being charged at charging station
International Stock News

Why did the Tesla share price just tumble 7%?

Nasdaq investors just sent the Tesla share price sharply lower.

Read more »

A woman is excited as she reads the latest rumour on her phone.
Broker Notes

Goldman Sachs says this US stock is replacing Tesla in the Magnificent Seven

And no, it's not a tech company. It's in the healthcare sector.

Read more »

A man looking at his laptop and thinking.
Share Gainers

Should I buy Nvidia stock as an Australian investor?

Many Aussies are thinking of jumping on the bandwagon, but they need to think about these issues first.

Read more »

Digital rocket on a laptop.
Broker Notes

Is the Nvidia share price on course to reach US$1,400?

You betcha, says one analyst.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Could Nvidia become the most valuable stock on earth?

Can anything stop the Nvidia stock price?

Read more »

A group of young ASX investors sitting around a laptop with an older lady standing behind them explaining how investing works.
International Stock News

What can ASX investors learn from Warren Buffett's latest buys and sells?

We've just found out what Buffett's been buying and selling recently.

Read more »

electric vehicle such as Tesla being charged at charging station
International Stock News

Why Tesla stock tanked in January

Will the electric vehicle leader see earnings decline once again in 2024?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
International Stock News

Will Nvidia stock be worth more than Microsoft by 2030?

The graphics giant has been growing at a much faster pace than Microsoft, but can it sustain that momentum?

Read more »