(Bloomberg) — Meta Platforms Inc. CEO Mark Zuckerberg asked investors for patience with the social media giant’s swelling investments in unproven games in an already challenging time for digital advertising companies.
Most read from Bloomberg
The company’s shares fell about 20% in premarket trading before the stock exchanges opened in New York on Thursday after it gave a disappointing quarterly earnings outlook. On a call Wednesday, Zuckerberg tried to justify Meta’s ballooning costs to fund its version of virtual reality, the metaverse, as well as the artificial intelligence driving major changes in social networks.
Investors, who have already sent the stock down 61[ads1]% this year, are so far not buying it. Zuckerberg said he’s confident Meta’s biggest bets in areas like short-format video, business messaging and metaverse were headed in the right direction — he just couldn’t say for sure how big the payoff would be.
“I think we’re going to solve each of these things over different periods of time,” Zuckerberg said. “And I appreciate the patience, and I think those who are patient and invest with us will end up being rewarded.”
It’s proving to be a tough sell when the company expects its already falling revenue to be less than analysts expected, and costs to be higher. On Wednesday, Meta said third-quarter revenue fell 4.5% from a year earlier, just the second time the company’s sales have ever declined — the first was last quarter. In the last three months of the year, Meta expects the trend to continue. The company’s forecasts for the fourth quarter came in at the low end of analysts’ estimates.
Meta now expects total spending for this year to be $85 billion to $87 billion. By 2023, that number will grow to an expected $96 billion to $101 billion, the company said Wednesday.
Read more: Meta falls as sales forecast shows depth of weakness in ad market
The company, which changed its name from Facebook to Meta a year ago, is also betting big on the metaverse, virtual reality-driven gathering places that Zuckerberg believes will host the future of work and communication. The effort is losing Meta billions, and the company expects to lose more money on its metaverse business next year.
Meta is not the only Internet company suffering from a weak advertising market; both Alphabet Inc. and Snap Inc. were hammered with equally weak results. It’s the only company overhauling how social media platforms work, while spending roughly one out of every $10 it generates in sales on a virtual future that’s still years away.
Over the past year, Meta has changed Facebook and Instagram’s experiences to show more algorithmically selected content and fewer posts from the people users follow. It also prioritizes short-form videos, called Reels, in response to ByteDance Ltd.’s popular TikTok app, which has won users’ time and won them over to a feed of vertical videos based on specific interests.
Meta’s legacy social media products must remain popular enough to generate the ad revenue that will fund Zuckerberg’s metaverse vision. In the third quarter, 4% more people spent time on Meta’s platforms each day, compared to the same period last year, with 2.93 billion daily active users. On a monthly basis, the tech giant saw 3.71 billion active users for its family of apps, which also includes Messenger and WhatsApp.
On Wednesday, the company claimed Instagram passed 2 billion monthly active users, saying those people are spending more time watching Reels — and marketers are spending advertising there, at an implicit rate of $3 billion a year in revenue. But Reels is drawing on revenue, to the tune of $500 million in the most recent quarter, as its newer product cannibalizes other ad spaces that cash in on faster rates. It could be as much as 18 months before that changes, Zuckerberg said.
“The way investors feel right now is that there are just too many experimental bets versus proven plays at the core,” Brent Thill, an analyst at Jefferies LLC, said on the earnings call with Meta executives.
Zuckerberg has asked for patience before. In 2015, investor questions focused on when WhatsApp, Instagram and Messenger would make money. The difference then was that these programs already had hundreds of millions of users each.
“Meta needs to turn its business around,” said Debra Aho Williamson, an analyst at Insider Intelligence. “As Facebook Inc., it was a revolutionary company that changed the way people communicate and the way marketers interact with consumers. Today, it is no longer the innovative trailblazer.”
(Updates with pre-market trading in the second section.)
Most read from Bloomberg Businessweek
©2022 Bloomberg LP