Facebook-Parent Meta Revenues & Profits Drop, as Spending on the Metaverse Continues
Poor Financials
Meta Platforms released its financial results for the third quarter of the year on Wednesday after market close, which revealed another slide in its top and bottom lines, on both quarterly and yearly basis.
Revenues dropped to $27.714 billion and the firm expects the year-over-year decline to continue in the fourth quarter, projecting sales in the range of $30-32.5 billion, against $33.671 billion in Q4 2021. Founder & CEO Mark Zuckerberg, talked of "near-term challenges", but sees "a return to stronger revenue growth". [1]
Profits halved compared to a year ago, to $4.395 billion and expenses ballooned 19% to around $22 billion. Operating margins were squeezed further to 20%, which however is still a healthy percentage.
CFO Dave Wehner took note of the efforts to rationalize costs and marginally cut the 2022 total expenses projections to $85-87 billion, from $85-88 billion. It is evident that such efforts need time to produce results, since the firm is in a spending cycle, trying to grow the metaverse.
The firm has taken a big hit from Apple's App Tracking Transparency (ATT) changes, but the headwinds on year-over-year growth diminished this week.
Advertising Headwinds
The advertising landscape is very challenging and tech firms whose revenue stream relies heavily on ad-sales, are feeling the detrimental effect. The popular social media app Snap, posted its first single-digit revenue growth since it went public, noting that its advertising partners decrease their budgets "in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital". [2]
Tech giant Alphabet (GOOG.us) saw a sequential drop in Revenues from Google advertising and Youtube ads in the third quarter, with Chief Business Officer Philipp Schindler talking of a further pullbacks in advertising spending. [3]
Meta Platforms was no exception as today's financial results showed, while CFO Dave Wehner noted during the earnings call, the adverse impact on Revenues of "weak advertising demand" due to the "uncertain and volatile macroeconomic landscape". [4]
Increased Competition
The social media giant - and even more so Facebook - has been seeing various cooler and more nimble rivals such as TikTok, challenging its reign and CEO Zuckerberg acknowledged "a lot of competition".
Meta Platforms is trying to address such challenges with features such as Facebook & Instagram Reels - TikTok-like short videos - with Mr Zuckerberg being pleased by the strong user engagement which is driven partly by progress on products such as this. During the earnings call he also added that there are "more than 140 billion Reels plays" across those two platforms every day.
Tuesday's metrics offer some encouraging signs, as Facebook average Daily Active Users (DAUs) increased to 1.98 billion as of September 30, marking 3% year-over-year growth. The entire Family of Apps, which also includes Instagram, Messenger, WhatsApp and other services, had 2.93 billion Daily Active People (DAP), up 4% compared to a year ago.
The Metaverse Bet
CEO Mark Zukerberg has clearly laid out the firm's vision and priority for the future, which is none other than building the Metaverse - a 3D virtual world where users can interact in simulated environments. However, this requires time, effort and lots of money.
The segment responsible for delivering on this vision, the Reality Labs, is a money pit. It operated at a loss of $3.5 billion in the last quarter alone, with the loss during the first nine months of the year exceeding $9 billion. More to it, the CFO expects the operating losses to "grow significantly" in 2023 year-over-year. [4]
Meta Platforms has drawn heavy criticism around the commitment to building the metaverse, as markets appear worried about the large sums of money thrown at this future product and also seem to be afraid that not enough is being done to address problems with its core business.
CEO of Meta-shareholder Altimeter Capital, recently called Mr Zuckerberg to change course and reduce headcount expenses by expenses 20% and to limit investment in the metaverse to no more than $5 billion/year. [5]
Mr Zuckerberg is definitely making a big bet, which if it does play out, could potentially give Meta a huge advantage over competitors. He alluded to the long road ahead during the earnings call, but defended his strategy, saying that "we are clearly doing leading work here". He also added that such investments "are going to end up being very important investments for the future of our business".
Meta Stock
Wall Street reacted negatively to Wednesday's results and are nervous around the spending towards establishing the Metaverse in the current financials environment, sending the stock around 20% lower in today's pre-market at the time of writing.
META.us has wiped out around 60% of its value during the first nine months of the year and extended its slide to the lowest level since the beginning of 2017 during the current quarter.
Nikos Tzabouras
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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