Meta’s streak of worrying earnings reports had to end sometime, and apparently it just did — sort of.
On Wednesday, the Facebook and Instagram parent reported its third straight profit and revenue decline for the fourth quarter, but still managed to eke out a win, since sales weren’t as dismal as analysts predicted. That, and the company’s planned $40 billion stock buyback, were apparently good enough for Wall Street to send shares soaring almost 20 percent in after-hours trading on Wednesday, leading into more gains on Thursday, when they rose 23.3 percent to $188.77.
Of course, “dismal” is relative. Analysts were braced for revenue of $31.5 billion in the fourth quarter of 2022, so they were pleasantly surprised by Meta’s actual haul of almost $32.2 billion — even though it represented a 4 percent decline over the previous year. Net income fell even further, with profit of nearly $4.7 billion signaling a 55 percent year-over-year drop. Meta blamed weak advertising demand due to macroeconomic concerns.
But those are just details. There’s a bigger picture for investors, especially after watching 2022 gut the company of more than $600 billion in market value. The business somehow capped a rough year, one that was historic for all the wrong reasons, on an optimistic note. Now it vows to streamline and optimize the operation to keep the good news coming.
In a statement, chief executive officer Mark Zuckerberg pledged that 2023 will be the “year of efficiency,” with management looking to strengthen the business while making it more nimble.
Anyone who doubts the tech company’s ability to make difficult choices need only look to the recent past: In November, it jettisoned more than 11,000 employees in layoffs that cut 13 percent of its workforce. Going forward, it forecasts a reduction in capital expenditures, shaving some $4 billion off its previous estimate to between $30 billion and $33 billion by spending less on building data centers. What remains will continue to go toward supporting the “Family of Apps.”
Meta isn’t just throwing a bone to the investors more interested in Facebook, Instagram, WhatsApp and Messenger than its metaverse plans. The former is a crucial part of the latter, as those apps will be key to onboarding consumers to the futuristic tech.
For instance, Instagram has been steadily introducing more features to showcase NFTs or even mint them. Facebook, Instagram and Messenger also launched support for 3D avatars and WhatsApp followed suit, rolling them out in December.
One month in and “more than 100 million people have already created [WhatsApp] avatars in the app,” Zuckerberg told analysts in a call on Wednesday. “And of those, about one in five are using their avatar as their WhatsApp profile photo.” He believes that most people’s introduction to the metaverse will happen on phones, and that will lead to building digital identities across all the platforms.
Put another way, he sees the metaverse as foundational to the future of the immersive internet and his apps are foundational for his vision of the metaverse. So these social media businesses must stay healthy. They’re not just the primary profit center, which so happens to fund this pursuit of the metaverse. But these apps are also the key to populating it.
And yet, some curious moves cast doubt on app priorities like Reels, its short video format, and Shops. Most recently, Instagram revealed changes that bump the Reels button to the right of its central location in the dock and removes the Instagram Shop tab completely. Representatives framed the decision as a user interface change based on feedback and Adam Mosseri, Insta’s top executive, denied that they were being deprioritized.
As if to back that up, Zuckerberg offered a few updates: Plays of Reels videos on Facebook and Instagram more than doubled in 2022, and the rate of reshares grew even faster, more than doubling over the last six months across both apps. Although major headwinds are expected this year, once Meta is on the other side, it should be able to monetize Reels more efficiently — say, by the end of this year or in early 2024.
For Shops, the company continued to test ads in the U.S. last quarter, he explained, and “we’re seeing increased performance by helping direct consumers where they’re most likely to purchase.” Meta saw triple-digit growth in revenue and adoption from one small base during the quarter, which, admittedly, is a limited result. But he takes it as a good sign. The revenue run rate for Shop ads data also appears to be increasing rapidly and the company expects it to normalize to a lower level in 2023.
These types of efforts matter profoundly to the business. Of Meta’s $32.2 billion revenue in the quarter, $31.3 billion came from the apps’ ad revenue. That’s 4 percent less than last year, but still plenty to help offset Zuckerberg’s metaverse initiative, which is an enormously expensive endeavor. The Reality Labs division, which creates augmented and virtual reality hardware and software, is bleeding money. Last year it reported $13.7 billion in losses, and in the last quarter, its year-over-year loss ballooned by $1 billion.
Some of that will be made up with the release of its next consumer VR headset, planned for later this year, but almost certainly not all of it. The software ecosystem won’t help much either. So far, there are more than 200 VR apps and they generate more than $1 million, which is a mere pittance.
Meta’s bet on the future has been a slowly evolving and costly endeavor, and the wait to see how it pans out seems particularly agonizing against the backdrop of a fast-moving tech sector. That casts the latest upswing in shares more as a sigh of relief about the core business than confidence in Zuckerberg’s long-term vision — especially as interest in the metaverse and crypto investments, in general, has waned over the last several months.
Then again, that may be changing, as the metaversal segment appears to be breaking away from the crypto pack. According to CoinMarketCap, as Bitcoin and Ether clocked growth of 40 percent and 33 percent, respectively, in January, cryptocurrencies from Decentraland and The Sandbox saw growth jump 156 percent and 94 percent, respectively. That’s great news for Decentraland, in particular, as it prepares for its second Metaverse Fashion Week in March. That might be good news for Meta as well.
The effect on virtual commerce and digital goods — particularly those backed by the blockchain and transacted in cryptocurrencies, such as NFTs — is hard to predict. But at least for now, Meta and others may have a bit more runway for their metaverse dreams to take off.