Mark Zuckerberg is spending billions on the metaverse. Wall Street wants him to fix Facebook and Instagram first

In the end, the Street always wins.

Silicon Valley’s chief metaverse champion gave in Wednesday to investors concerned about the company’s rampant spending, pledging to trim the company’s budgets for augmented and virtual reality, artificial intelligence, and business platforms.

The concession followed an earnings report that showed first-quarter spending on Reality Labs—Meta’s augmented and virtual reality division—totaled $3.7 billion on only $700 million in revenue. The resulting operating loss put Reality Labs on track to lose $12 billion in 2022, up from $10.2 billion in 2021.

“These investments are going to be important for our success and growth over time, so I continue to believe we should see them through,” Zuckerberg said during Wednesday’s earnings call. “But with our current business growth levels, we’re now planning to slow the pace of some of our investments.”

Any belt-tightening will be fractional in the grand scheme of Meta. Executives dropped their companywide 2022 expense estimates to between $87 billion and $92 billion, down from an earlier outlook of $90 billion to $95 billion. But the adjustment signaled that Meta officials recognize the need to rebalance their priorities, putting more focus on short-term revenue issues tied to underwhelming growth and lower monetization rates on Facebook and Instagram.

Zuckerberg has pitched the still-nebulous metaverse as the next iteration of our digital experience, one that will eventually replace the smartphone and personal computer. By staking a claim to the metaverse, Meta could control the platform underpinning the ecosystem. 

If Zuckerberg’s vision comes to fruition, Meta could reap huge profits through various metaverse revenue streams—similar to how Apple and Google post massive margins via their respective iOS and Android operating systems—and reduce its reliance on fickle ad sales. 

But first, Meta needs to develop the technology, invent the infrastructure, and create the accompanying hardware—with no guarantee that consumers and businesses will embrace the product. To illustrate the size of the gamble, some context: Meta’s $10.2 billion Reality Labs loss last year is almost double Alphabet’s largest annual operating loss on its Google Cloud division, one of the industry’s most ambitious spend-money-to-make-money endeavors.

Wall Street surely would afford Meta some more financial slack on Reality Labs in boom times. But just as Meta piles billions into the unprofitable metaverse, the company’s core app businesses—namely, Facebook and Instagram—are slowing down. 

Meta reported meager first-quarter revenue growth of 7% year over year, its smallest uptick since going public in 2012, as a global pullback in digital marketing and Apple’s iPhone operating system changes weigh on ad sales. 

About 2.87 billion people used Meta apps in the first quarter, a year-over-year increase of 6%. The mere fact that Meta added users helped send shares up 17% in midday trading Thursday, a sign of Wall Street’s recalibrated expectations. Meta’s stock price is still down 47% from September’s 52-week high, even after Thursday’s surge.

Those numbers are hard to stomach when Zuckerberg continues to warn that any metaverse payoff remains distant. Without a hint of irony, Zuckerberg said on Wednesday’s earnings call that the Reality Labs spending is “laying the groundwork for what I expect to be a very exciting 2030s, when this is sort of more established as the primary computing platform at that point.”

Analysts hailed the spending pullback ahead of Thursday’s market opening, praising Meta executives for recognizing the need to solidify their still-profitable advertising business at some expense of the tantalizing metaverse. Citi analyst Ronald Josey said Meta’s first-quarter results and earnings call statements “were what was needed for shares to stabilize given recent market volatility,” per MarketWatch.

Zuckerberg will still get plenty of time and money to pioneer the metaverse. It just might take him a little longer to reach the promised land.

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Jacob Carpenter

NEWSWORTHY

A final earnings hurrah? Twitter posted solid first-quarter revenue and user growth figures ahead of Elon Musk’s planned takeover of the company later this year, the Wall Street Journal reported Thursday. Twitter’s first-quarter revenue jumped 16% year over year, fractionally below analyst estimates, but topped forecasts by adding about 14.3 million daily active users. Twitter shares rose 2% to $49.47 in midday trading Thursday, still below Musk’s agreed-upon purchase price of $54.20 per share. Twitter executives also disclosed an internal error that led to an overcount of daily active users before the start of 2022.

Going another round. The European Union plans to file new antitrust charges against Apple next week, setting the stage for the latest high-profile regulatory battle between the bloc and Big Tech, the Financial Times reported Thursday. Regulators are expected to allege that Apple violated EU laws by shutting out rival payment processors and banks from the company’s Apple Pay system. The charges would become part of a campaign by EU legislators and regulators to crack down on large tech companies’ refusal to open up their app stores and commerce-related platforms to other companies.

Enjoy while it lasts. Samsung scored a huge jump in first-quarter profits, though the South Korean tech giant warned that the banner results likely won’t extend into the rest of 2022, Bloomberg reported Thursday. Strong semiconductor and high-end smartphone sales propelled Samsung to $8.8 billion in net income, up more than 50% year over year and well above analyst estimates of $8 billion. Company executives tamped down forecasts for the second quarter and beyond, however, citing the impact of global inflation, China’s COVID-19 lockdowns, and geopolitical roadblocks.

No hiding here. Weibo, China’s version of Twitter, announced plans Thursday to begin publishing the IP address locations of users posting on the site, aiming to spotlight the sources of nefarious online behavior, Reuters reported. The setting, which can’t be turned off, will result in geotags showing the Chinese municipality or province for domestic posters and the country where overseas users are microblogging. Weibo officials, who have faced added regulatory scrutiny in recent months from the Chinese government, said the feature will help expose the location of users sowing discord or misinformation.

FOOD FOR THOUGHT

Online overkill? Is it possible that we’re finally becoming too inundated with apps, ads, and content? As Axios noted Thursday, this first-quarter earnings season suggests it’s possible. The slowdown in revenue and user growth at Netflix, Meta, Alphabet, Spotify, and other companies trading in social currency hints at an oversaturation of the attention economy. Several factors certainly could be at play—declining real wages, inflation, Russia’s invasion of Ukraine, among others—but the trend has industry executives on edge.

From the article:

The pandemic pivot to digital prompted enormous investments in new technologies like streaming, e-commerce and the metaverse. But while media consumption levels are still up compared to the pre-pandemic era, growth is expected to slow down meaningfully, making it harder for companies to justify long-term investments. 

As more companies begin to streamline costs, it may help consumers feel less overwhelmed by options.

IN CASE YOU MISSED IT

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Why the DeFi world is worried about a push for stronger bond market regulation, by Declan Harty

Elon Musk is responding to tweets criticizing Twitter. Is he allowed to do that?, by Marco Quiroz-Gutierrez

What Elon Musk’s history of following a small number of people and blocking critics says about his view of the company, by Tristan Bove

Music artists are making what they’d earn from 1 million streams in ‘2 minutes’ with NFTs. Now they’re turning toward Web3—right alongside Snoop Dogg, by Taylor Locke

Elon Musk is joking about buying Coke to ‘put the cocaine back in’ as investors worry whether his Twitter buy will go through, by Sophie Mellor

Here’s how Twitter will change as a business if Elon Musk takes it private, by Stan Choe and the Associated Press

BEFORE YOU GO

Beyond the set-top box. Hey, somebody woke up the cable companies from their slumber. Variety reported Wednesday that Comcast and Charter Communications will form a rare partnership to develop a streaming platform and hardware device, taking aim at Roku, Amazon, and other well-established players in the space. While Comcast already offers both products, the two cable giants hope the joint venture will result in a platform that’s more attractive to smart TV manufacturers, app developers, and consumers. Terms of the deal aren’t yet finalized, though Charter has committed to a multiyear investment totaling $900 million.