As you may have heard, Meta announced Q4 earnings last week. The quick summary is that it reported $32 billion in revenue, beating an expected $31.53 billion. It reported $1.76 in earnings per share versus $2.22 estimated, but those were dragged down by restructuring charges from Q4 layoffs. Beyond overall quarterly performance, the bigger story may be what’s occurring within Meta Reality Labs (MRL). This is where it houses R&D and production for AR, VR, and all things metaverse. There, revenue (mostly Quest 2 sales) was down year-over-year but was up quarter-over-quarter.
Those fluctuations are all about the holidays and the economy. Specifically, quarter-over-quarter revenue was up due to the stamdard Q4 holiday spending cycle. But it was down year-over-year because of downturn-softened consumer demand on discretionary spending… which VR headsets certainly are.
But more attention was rightly placed elsewhere in Meta’s P&L. Scanning further down, a $5 billion Q4 expense sticks out like a sore thumb. This is the money Meta invests to build out its vision for the metaverse, including deep research into solving some sticky challenges in VR headsets.
Necessary Evil
This expense is a bone of contention throughout the tech world and, especially, among Meta investors. There, the message to investors is to stick with Meta while it builds and cements a central position within, computing’s next era. It’s no secret that it believes that future will be “embodied” in 3D.
In the Q4 earnings, there was some additional messaging meant to reassure investors. Commitments to some belt-tightening and a $40 billion Zuckerburg stock buyback seemed to do the trick as Meta stock jumped 23 percent. And it has sustained around that elevated level as of this writing.
Meta has also learned to ease back on the metaverse exuberance that was pronounced in past earnings calls and public appearances. Now, it applies more balanced messaging that lightens up on the m-word. For example, it was mentioned seven times in the Q4 earnings call versus 23 times in the Q3 call.
Put another way, Meta is beginning to angle the MRL expense as a necessary evil to build the company’s future. That requires two things: One is lots of investor patience (which is running thin). And two is a leadership structure that enables Zuckerberg’s unilateral control. Few companies can do this.
Beyond the shifting comms approach at Meta, the elephant in the room is the massive MRL investment itself. Panning back from the Q4 $5 billion expense, the full-year 2022 total is $13.7 billion. That’s a lot of guacamole. The ultimate question is if this is well spent. And there’s no shortage of opinion on that topic.
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Lifeboats
The prevailing sentiment among that opinionated chorus is that Meta Reality Labs is an ill-timed passion project. But to play devil’s advocate given Meta’s core business declines, wouldn’t now be precisely the time to build lifeboats? MRL is more like a cruise ship, but the point remains: building for the future.
Moreover, Meta’s investments in VR hardware and operating system make it a bonafide platform. That gives it vertical integration and less dependence on the uncertainties of piggybacking on others’ platforms (read: iOS and Android). Meta has learned this lesson the hard way in the smartphone era.
In fact, that’s exactly where the declines in its core business come from. Operating on someone else’s stack has caused its business to operate at the whims of Apple and Google’s platform restrictions. Apple’s ATT alone has caused billions in revenue declines among ad-supported social players.
Meanwhile, despite all the schadenfreude in the tech press, Meta continues to build for the long haul. MRL net losses are projected to widen in 2023 but, more importantly, it’s using today’s dollars to build tomorrow’s business. So it will be all about getting there faster and selling investors on the vision.
