Ad Revenue Declines, Metaverse Investment Increases... Meta Stock in 'Free Fall' (Comprehensive)

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Meta Platforms, the parent company of Facebook, recorded its first-ever consecutive negative (-) revenue for two quarters and is expected to miss market expectations for the fourth quarter (October to December) this year. With its core advertising business freezing up, Meta announced plans to further expand investments in new growth engines such as the metaverse and virtual reality (VR) through next year, raising concerns about profitability. Following the earnings announcement, Meta's stock price plummeted by more than 20%.

◆ 'Core Business' Advertising Revenue ↓… Reality Labs Posts 13 Trillion Won Loss This Year Alone

According to Bloomberg and others on the 26th (local time), Meta announced in its earnings report that its third-quarter revenue (July to September) this year was $27.714 billion (approximately 39.4 trillion won), down 4% compared to the same period last year. After recording its first-ever quarterly revenue decline of 1% year-over-year in the second quarter, Meta's revenue decreased again for two consecutive quarters compared to the previous year.

Meta's third-quarter net profit was $4.395 billion, less than half of the net profit in the third quarter of last year. Earnings per share were $1.64. Meanwhile, company expenses rose 19% year-over-year to $22.1 billion. Operating profit fell 46% to $5.66 billion compared to the third quarter of last year. Consequently, the operating margin sharply dropped from 36% in the third quarter of last year to 20% this year.

Daily active users (DAU) were recorded at 1.98 billion, and monthly active users (MAU) at 2.96 billion. These figures represent increases of 3% and 2%, respectively, compared to the same period last year. This contrasts with the situation last year’s fourth quarter when user numbers declined for the first time, causing a stock price crash.

[Image source=Reuters Yonhap News]

Meta earns 98.2% of its revenue from advertising. Recently, it has been hit by economic uncertainties and Apple’s iOS operating system update citing privacy protection. Additionally, competition has intensified with the rise of China’s ByteDance social networking service (SNS) TikTok. Meta is expanding Instagram’s short video service 'Reels' but is struggling.

Meta’s advertising revenue for the third quarter was $27.237 billion, down 3.7% year-over-year. Although this exceeded Wall Street’s forecast of $26.9 billion, the year-over-year growth rate in this segment has been declining this year, with 6.1% in the first quarter and -1.5% in the second quarter. The average price per ad also fell 18% compared to the third quarter of last year.

Revenue from Reality Labs, which includes virtual reality headsets and the metaverse business that Meta is aggressively pushing, nearly halved to $285 million. Losses expanded from $2.63 billion to $3.67 billion. This segment has recorded losses of $9.4 billion so far this year.

Meta stated, "We expect Reality Labs’ operating losses in 2023 to increase significantly compared to the previous year," adding, "We plan to accelerate investments in Reality Labs after 2023 to achieve long-term operating profit growth targets for the entire company."

◆ Meta Forecasts Increased Expenses… Zuckerberg: "Patience Will Be Rewarded"

[Image source=Reuters Yonhap News]

The problem is the outlook is not bright. Meta forecasts fourth-quarter revenue of $30 billion to $32.5 billion. Wall Street’s estimate is $32.2 billion, near the upper end of Meta’s guidance. If Meta’s forecasted revenue materializes in the fourth quarter, it will mark three consecutive quarters of year-over-year revenue decline, CNBC reported.

Behind Meta’s bleak outlook is expanding costs amid core business stagnation. As inflation rises and recession fears grow, companies are cutting advertising and marketing budgets, freezing the advertising market, while Meta is increasing investments in new growth engines like the metaverse and virtual reality.

Meta announced in its earnings report that total expenses this year are expected to be $85 billion to $87 billion, with projections to expand to $96 billion to $101 billion next year. Capital expenditures, including financial costs, are estimated at $30 billion to $34 billion this year and $34 billion to $39 billion next year.

Aaron Rakers, a Wells Fargo analyst, said in a report released that day, "Concerns grew that Meta would significantly cut capital expenditures following the third-quarter results, but tonight we saw exactly the opposite." Business Insider described this as "Facebook and Meta CEO Mark Zuckerberg giving Wall Street the giant middle finger."

Mark Zuckerberg, Meta CEO
Photo by AP Yonhap News

CEO Zuckerberg said during the earnings conference call, "We are making significant changes overall to operate the company more efficiently," adding, "We have strengthened the review of all operating expenses." He continued, "We face short-term revenue challenges, but the fundamentals are in place for stronger revenue growth," and "Next year, we will focus on priorities and efficiency to navigate the current environment well and emerge as a stronger company."

He also said, "We believe we will address each issue at different times," and "We appreciate investors’ patience, and those who wait and invest in us will ultimately be rewarded."

After-hours trading saw Meta’s stock price plunge more than 20%, hitting the $104 range, the lowest level since 2016. CNBC noted, "Meta’s stock price continues its freefall this year."

This content was produced with the assistance of AI translation services.