Meta's weakening fundamentals have kept investors away from the stock. But Meta is trading at a low valuation (for now) Further growth in operating losses without a noticeable topline growth will be a red flag. While Meta has all the resources it needs (financial, talent, and technical know-how) to invest in and grow this venture, investors should closely monitor this segment's development. The weak topline performance suggested Meta's VR headset struggled to expand beyond its early adopters and raised the question of whether it was sensible to allocate almost a third of Meta's operating profits to metaverse projects. While losses ballooned, Reality Lab's revenue was almost flat over the same period. Meta's seriousness is evident in its financial numbers: Loss from Reality Labs grew 37% in the first nine months of 2022 to $9.3 billion, around 29% of the advertising business's profits.īut here's the problem. To gain a foothold, Meta invests heavily in its hardware (virtual reality, or VR, and augmented reality, or AR) and creates an ecosystem of users, developers, and partners. Morgan predicted $1 trillion in revenue for this industry. Meta's metaverse is burning cash rapidlyĪbout a year ago, Facebook changed its name to Meta to reflect the pivot toward the metaverse. It will take at least a few more quarters for investors to judge whether the recent fall in earnings is a blip or a permanent decline. Meta is working to turn its advertising business around - via Reels, investing in artificial intelligence, and improving monetization. For example, Reels - Meta's short-form video service - delivered 140 billion plays per day, a 50% improvement from six months ago. Meta's solid engagement levels suggested the weak financial performance was more likely a result of lower industrywide advertising activities - plagued by a weak economy, the war in Ukraine, and so forth - than its failure to retain and delight users. The silver lining was that the family of apps (Facebook, Facebook Messenger, WhatsApp, and Instagram) delivered improved engagement levels in the third quarter of 2022, with daily active users (DAU) growing 4% year over year to 2.9 billion and monthly active users (MAU) improving 4% to 3.7 billion. Financially, the advertising segment delivered progressively lower income every quarter in 2022, from $11.5 billion in the first quarter to $9.3 billion in the third quarter. Once the bedrock of Meta's business, the advertising segment got hit hard by the challenging economy, competition from short-form video companies, and ads signal loss due to the change in Apple's IOS policy. Declining revenue and growing expense contributed to the lower operating income. Groupwide operating income fell 25%, 32%, and 46% in the first, second, and third quarters, respectively, of 2022.
Such poor performance was alien to a company accustomed to delivering solid performance over the years.īut as Meta reported its performance in the subsequent three quarters, investors became horrified by what they saw.
When Meta reported a 1% decline in operating income for the fourth quarter of 2021, everyone was shocked. Meta's advertising business is struggling
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