Zuckerberg’s Metaverse Ambitions Bleed Billions

Mark Zuckerberg’s fading fortunes (and you can take that figuratively, literally or both) hung in the balance Wednesday, when the company formerly known as Facebook reported Q3 earnings with the potential to shake fragile investor confidence further.

Zuckerberg, who tumbled down a list of the world’s richest people this year amid a 60% wipeout in Meta shares, has been the subject of endless derision for his virtual ambitions. A Bloomberg article published on October 18 featured an animation of a weeping Mark floating alone, legless, in a digital desert — a lonely tumbleweed rambles by, and the camera zooms in on his tears. “The best thing you could say about Mark Zuckerberg’s flailing attempt to sell the world on his grand visions of the future is that he’s trying,” Max Chafkin wrote.

That’s but one example. Suffice to say Web 2.0 is littered with comedic lamentations for Zuckerberg’s unfulfilled Web3 dreams. For the media, it’s a source of amusement. For at least some shareholders, Zuckerberg’s focus on the metaverse is a source of consternation.

“Like many other companies in a zero rate world, Meta has drifted into the land of excess,” Altimeter Capital Management, which owns some 2.5 million shares, recently wrote. “At the same time that Meta ramped up spend, you lost the confidence of investors,” the same open letter charged, on the way to advising Zuckerberg to “limit investment in metaverse / Reality Labs to no more than $5 billion per year,” among other suggestions.

Reality Labs revenue was $285 million during Q3, down 50% and “just” shy of the $406 million consensus expected. The segment lost $3.672 billion during the quarter (figure below), bringing the red ink in Reality Labs to almost $9.5 billion in 2022, or more than $1 billion per month. Analysts expected a $3 billion loss for Q3.

“We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year,” the company said Wednesday. “Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income in the long run.”

Overall revenue at Meta fell 4% YoY to $27.71 billion (figure below). That was slightly better than expected, and I do mean slightly. Consensus was looking for $27.41 billion.

Zuckerberg acknowledged “near-term challenges on revenue,” but insisted that “the fundamentals are there for a return to stronger revenue growth.”

With apologies (and while readily conceding that Facebook analysis is not my wheelhouse) the problem appears to go well beyond “near-term challenges on revenue.” There are very serious questions about the company’s direction and long-term strategy.

Profit dropped by 50%. Net income was $4.395 billion versus $9.194 billion during the same period last year. EPS of $1.64 was down 49% and counted as a big miss. Consensus wanted $1.84. The margin contraction looked egregious. Meta’s operating margin was 20% during the quarter, a 200bps miss to consensus and not even comparable to 36% a year ago.

It wasn’t all terrible news. Advertising revenue fell 3.7% YoY, but eked out a beat. Facebook daily actives of 1.98 billion was better than expected, and the monthly number was in line. Ad impressions beat, rising 17%, but average price per ad tumbled 18%, more than anticipated.

Meta’s guidance won’t help. Revenue will be between $30 billion to $32.5 billion in Q4, the company said. The Street wanted $32.2 billion. The FX headwind is seen at 7% next quarter. Expenses in 2023 may be as high as $101 billion, or $96 billion on the low-end. Analysts were looking for $93.2 billion. Capex plans were well ahead of estimates, which in this case might not necessarily be good news, although I’ll leave that judgment to company analysts. Meta said “substantially all” of capex growth next year will be in expanding the company’s “AI capacity.” One silver lining could be a boost to beleaguered chip stocks.

Headcount was up 28% YoY. Late last month, Zuckerberg told employees Meta would freeze hiring and implement a team restructuring initiative in a bid to cut costs. “We are holding some teams flat in terms of headcount, shrinking others and investing headcount growth only in our highest priorities,” the company said Wednesday. Headcount at the end of next year will be roughly where it is today. Or at least that’s the plan.

It’s very difficult to imagine investors taking these results in stride. When companies face existential questions, investors don’t want existential answers. They want something tangible they can grab hold of. The metaverse is the opposite of that. Zuckerberg said the company’s community “continues to grow,” but DAP/MAP, DAUs and MAUs rose just 4%, 3% and 2% YoY, respectively.

In the simplest possible terms: Zuckerberg hasn’t convinced everyone (if he’s convinced anyone at all) that the metaverse pivot was a good idea. Operating losses in the segment responsible for executing on that pivot are snowballing, and by the company’s own admission, those already sizable losses are expected to get “significantly” larger.

As of the close of business on October 25, Zuckerberg’s net worth had declined by nearly $74 billion since the beginning of the year, according to Bloomberg’s calculations. On January 1, he was the sixth richest person on the planet. As of Wednesday morning, he was the 23rd richest. Meta’s shares were down 14% after hours. If those losses hold on Thursday, the shares would be down more than 70% from the highs.


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22 thoughts on “Zuckerberg’s Metaverse Ambitions Bleed Billions

  1. This will go down as a textbook case of product failure like New Coke, the Ford Pinto, and the Homer all rolled into one. It’s a mind-boggling sum to spend on something with so little return. Facebook would double in value if they shut down the metaverse and/or Zuckerberg resigned and gave up control of the company. I’d speculate he’s just lowering the price to increase stock buybacks, but share count is barely dropping because they hand out so much stock compensation.

    Those are the risks you take when one person maintains control of the whole company. Instead of gutting Twitter, maybe Elon needs to come clean house at Facebook.

  2. H-Man, jury is still out on verdict. Tesla was a money furnace for a long time. I am just confused about what is Meta going to do to generate money? Electric cars I understood. Meta I don’t. Sorta like me and crypto.

    1. Therein lies the problem. After spending months and a substantial sum of money meandering around in Web3, I can confidently say that the metaverse was more fun when all we knew of it was Grand Theft Auto and The Sims. There’s nothing there. In my opinion, there won’t ever be anything there, because there’s nothing new or novel about the concept itself. Simply putting a “Connect Your Wallet” button in the upper-right hand corner of a site and then letting people transact in crypto is enough to make you “Web3,” but it’s not clear (at all) what that accomplishes. You can have infinitely richer, infinitely more immersive experiences in Web 2.0 by “connecting” your regular old debit card — just ask any of these kids who are obsessed with playing regular video games online with other players from all around the world. That’s pretty immersive or if that’s not quite accurate, it certainly seems to be addictive, and all you need is a game console, a WiFi connection and a couple of bucks. It’s also far from obvious that VR headsets are somehow something that needs its own special operating division and needs to be classified as somehow synonymous with a revolution. I mean, we’ve been talking about this since The Lawnmower Man. As far as augmented reality goes, that’ll probably be a semblance of useful, but my guess is that Apple beats everybody to that, or if they’re late, they end up doing it so much better that everyone else’s version is immediately obsolete (or at least a lot less cool). So, ultimately, I don’t know where Mark thinks this is going, and while acknowledging that he’s a god and I’m a mortal, I’m not alone in thinking that the answer might be “nowhere.”

      1. Also, I’m not sure this plays to the company’s strength. Facebook knows everything about everybody, which affords them endless opportunities to influence human behavior, and thereby shape the future. But he’s taking a hugely expensive detour into something that’s based, in part anyway, on decentralization and anonymity. My sense is that a lot of Web3 purists don’t want him around in the first place, and in my judgment, he shouldn’t want to be there. As nefarious as this sounds, Facebook should focus on how to leverage everything it knows about everybody on the planet. I mean, he should be thinking about predictive analytics, etc., not crypto and VR headsets.

        1. Here I agree with you. But even before this, FB seems to have been flailing, looking for another success: libra, that videophone tablet thing. Maybe when this fails they’ll try to make an EV.

        2. The irony here being that Facebook knows everything about everyone but they somehow didn’t know that everyone isn’t interested in and doesn’t want to go to the metaverse.

          The VR headset they bought from Oculus is a good start but we’re nowhere near the Lawnmower man or Johnny Mnemonic. My son plays games on the Meta Quest, he and his friends are constantly bumping into furniture and walls because the device is not good at warning you that you are near an object though it has the cameras to see them.

          I believe that in order for web3 to truly take off someone needs to write a VR native programming language. One that takes advantage of the tools and controls in the VR headset and has libraries that provide needed functionality. Once the developers start flocking to that system and building VR native tools and applications, people will find more of a draw. At this point, the metaverse is like running an android app projected to look like it is 3D by the headset. That’s not really augmented reality.

          Also, the Meta Quest hand controllers are nothing like the glove systems devised in SciFi that actually give some tactile feedback and functionality in the VR world.

      2. If you think about it, when someone like Musk or Zuckerberg runs a company, the most likely outcome, given enough time, is that he will run the company into the ground. This is because these people are not, in fact, gods. They have some abilities, but by and large they got where they are through an incredible amount of luck. Zuckerberg, in particular, is not a god. He had the minimum amount of talent and ruthlessness required to take advantage of a once-in-a-billion opportunity, being in the right place at the right time. If we were to turn back the clock and roll the dice again, Mark wouldn’t be the winner, someone else would. Same for Musk, Bezos, etc. When you listen to these people speak, when they try to be visionary, all I hear is second-rate analysis and vision. Fly to Mars, entice people to walk around in a fantasy world…boring at best, colossal waste of resources at worst. I’m a nobody, yet in my life and my career I have encountered many people who far, far outshine Zuckerberg and Musk in nearly every manner possible–intellect, vision, analytical ability, knowledge, charisma–and who are simply better people than these people. If I were to end up seated next to Zuckerberg on a trans-continental flight, I imagine I would tire of the conversation far sooner than he would. Yes, the wealth of these people makes them influential, but stripped of that wealth, they are nothing. And the fact that they obtained this wealth through the companies they run does not mean that they are, in fact, good stewards of those companies.

        1. I can promise you that you do not know, and likely have not ever come across, anyone with the analytical ability of Mark Zuckerberg or the charisma of Elon Musk. You may think you do/have, but you haven’t. These guys, for all their flaws, aren’t akin to a random nobody who won a scratch off ticket. Not in a literal sense. Sure, they won the figurative lottery in a lot of ways, but so did you and I. None of us were born in North Korea, for example.

          1. I often tell people that I’m among the most privileged people ever to have lived—simply for having been born in the US during a time of peace and prosperity, into a middle class family, with the chance to get an education and a job that has rewarded me far more than I deserved. I won the lottery, absolutely.

            Certainly Zuckerberg has analytical ability. My point is that the world is full of impressive people, and I don’t find Zuckerberg or Musk to be among the most impressive. I think we can do better, much better, when we look for technical role models and thought leaders. And when you move away from the technical and financial arena, and consider their moral, ethical, and policy influence, then Musk, Zuckerberg, and Bezos fail miserably.

      3. the metaverse was more fun when all we knew of it was Grand Theft Auto and The Sims

        I promise I will stop repeating myself, but:

        No. All we knew of it was Second Life. And we all knew before this even began what became of that.

  3. Agreed @hookandgo, I’m a geriatric millennial and have no interest in “playing basketball” using software that controls my entire field of vision, but hey maybe it’ll be big with the kids.

    I don’t doubt they are doing some novel stuff, but I’m also inclined to agree with @dayjob. Textbook case of a guy who copied his way to the top tries to do something bigger with his pile of cash — if I were Mark, why not, I would have done the same thing with farming robots.

  4. Wave Dash, robots and farming makes more sense than Meta. If Musk can build a car with robots, he can build anything with robots. I should probably give Woods and Ark another look a little into the future.

  5. I’ve been experimenting with working in VR.

    You can put on Quest 2 goggles, boot up your laptop, and have five virtual monitors. The tech is, in my opinion, almost but not quite “there” yet (goggle resolution, lag, ability to see your physical keyboard, etc).

    I’ll probably buy the Quest Pro next year and try again. In theory, the improvements in that product could bring the tech to “there”. This is perhaps a niche use case, but the hassle of carrying four monitors, cables, dock, etc in the world’s heaviest carry-on bag this fall, through France and Italy, was such that META will get my money.

    On the stock, I don’t have a problem betting that online advertising will rebound in the coming year. GOOG seems like the safer vehicle for that bet on cyclicality. META is trying to build a whole new space, and that’s much higher risk and, at the AM price, also higher (possible) reward.

  6. In my view this Meta debacle is karma for Facebook. This nihilist company has done significant harm to humanity all in the pursuit of growth and ad revenue. Russia absolutely levered the Facebook platform to sew division in the United States and untether nearly half of the populous from reality. But that’s not even the worst of their sins. They propagated genocide, aided and abbeded slavery, and likely created a mental health crisis for teen girls. Through all of this no government or regulatory body has even began to think about punishing them. For this company to fail due to Zuckerburg’s hubris, I think that’s pretty damn funny.

  7. I am surprised I have yet to see anyone say how Z plans to monetize the “metaverse.” Will there be 3D interactive billboards in the VR games touting energy drinks, etc. I have just read some very interesting material discussing the nature of “free.” One thing we know about free is that when it morphs into “pay me now,” the outcome is not always good. As clever as Zuch may be, it’s not the kind of clever I care for. He’s a bit of a con man an an inveterate taker, IMHO, whose brain (CS) just took a cab out of town leaving us to watch the unveiling of what’s left of Z’s good idea bank.

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