Zuckerberg Doubles-Down on Costly Metaverse Bet as Stock Slumps to 7-Year Low

Another quarter, another huge earnings miss, another massive profit slide, and another nearly 20% drop in Meta’s share price.

And there’s the metaverse right in the heart of it, with Meta’s Reality Labs division — home of Horizon Worlds, the $1,500 Quest Pro virtual reality (VR) headset, and all things metaverse and augmented reality — gouging a $3.67 billion hole in the company’s earnings. That’s $9 billion sunk in the first three quarters, suggesting that CEO Mark Zuckerberg’s prediction that the company would spend $10 billion to $15 billion annually for the next decade is going to come out on the high side of that range.

To recap:

Net income dropped 52%, and spending rose 19%.

Revenue was down 4%, but beat expectations.

Earnings per share (EPS) were $1.64 compared to the $1.89 analysts had projected.

The $9.41 average revenue per user missed expectations by 42 cents.

To no one’s surprise, Zuckerberg offered no signs of retreat, and in fact doubled down on his insistence that the social media giant’s metaverse spending was wise, necessary, and going to continue.

He did, however, take pains to point out that the bulk of its capital expenditures were on its highly regarded artificial intelligence (AI) division and server data centers.

It’s also worth noting, that Zuckerberg mentioned the metaverse last when outlining the company’s top three spending priorities: “our AI discovery engine that’s powering reels and other recommendation experiences, our ads and business messaging platforms and our future vision for the metaverse.”

He also took pains to suggest that Reels — Meta’s lagging response to short video platform TikTok eating its lunch — was making headway, saying they grew 50% in six months.

In that Zuckerberg followed — or at least matched — the advice Altimeter Capital Management CEO Brad Gerstner, a major Meta investor, made public on Monday, telling Zuckerberg in an open letter that “the re-naming of the company to Meta… caused the world to conclude that you were spending 100% of your time on Reality Labs instead of AI or the core business.”

Money, Money, Money

Zuckerberg did not, however, take the rest of Gerstner’s advice about slashing spending by $20 billion, including $5 billion from Reality Labs’ budget. R&D costs rose 45%, he said, driven in large part by hiring for “Reality Lab segments as well as reality labs technology development costs.”

Instead he promised to “keep investing heavily” in those three areas, saying “our goal is to grow family of apps operating income, such that even with our AI infrastructure and reality labs investments, we can still meaningfully grow our overall company operating income in the long term.”

Beyond that, Zuckerberg said, “We do anticipate that Reality Labs operating losses in 2023 will grow significantly year over year. 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.”

R&D costs rose 45%, he said, driven in large part by hiring for “Reality Lab segments as well as reality labs technology development costs.”

Legging It

While he didn’t quite mention it outright, the media and social media storm that broke over his graphically terrible Horizon Worlds “selfie” post — followed by widespread scorn for the Meta metaverse avatars’ current lack of legs in August was on his mind.

“I know that sometimes when we ship a product, and there’s a meme where people say, ‘Hey, you’re spending all this money and you produce this thing,’” he said.  “I think that that’s not really the right way to think about it. There’s a number of different products and platforms that we’re building, where we think we’re doing weeding work… launching consumer products.”

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Zuckerberg said outright, what’s been obvious if you looked closely at Horizon Worlds: It is not really Meta’s metaverse, but a kludged-up place holder built from the entrance platform to the Quest headset’s 3D games. Both Horizon Worlds and its avatars, he said, are “an early version” of a social metaverse platform.

“I think the teams are making very good progress,” he said. “And I think this will be fundamentally important for the future. Nothing that we’re seeing suggests that that’s not going to be the case.”

Eye-Bulging

Zuckerberg also took time to highlight the newly released, $1,500 VR uber-headset that he has been pumping for months, saying it “delivers high resolution and mixed reality so you can blend the virtual objects into the physical environment around you. Pretty amazing when you see it, and it’s going to enable all kinds of new experiences and socializing, gaming fitness and work.”

But the new headset and its advanced capabilities are not only key to the entertainment metaverse, but to the working metaverse Zuckerberg has been touting so heavily, saying it will “enable more and more of these people to get their work done in virtual and mixed reality eventually even better than they could on PCs and to deliver a great working productivity experience.”

He added, “I’m really looking forward to seeing what people build with this new capability,” despite one reasonable answer being “credit card debt.”