Okay, quarterly revenue and earnings reported yesterday after the market close stank up the joint. Revenue at Facebook’s parent, fell 4.5% in the quarter, a second consecutive drop in quarterly revenue to $27.7 billion. Wall Street forecasts called for $27.4 billion.
Earnings per share tanked to $1.64 versus the $1.87 a share that Wall Street had expected.
The stock closed lower by almost 25% today, October 27.
But the big problem is that everything that CEO Mark Zuckerberg and his team said yesterday points to the continued pursuit of the same strategies and tactics that got the company to this point.
For example, the reason that earnings missed forecasts so badly while revenue was in the ballpark is that expenses for the company’s drive into products for the Metaverse have soared. And, according to company statements, expenses will grow n 2023. Meta Platforms now expects total expenses for 2022 to be $85 billion to $87 billion. For 2023, that number will grow to an expected $96 billion to $101 billion. The company’s additional expenditures are expected in data centers, servers, and infrastructure, as its headcount holds steady.
That surge in expenses comes at an “awkward” time because Meta Platforms told Wall Street to expect revenue to dip again in the fourth quarter. The company cut its revenue forecast to the low end of the consensus among Wall Street analysts. Free cash flow has all but disappeared. Over the past four quarters, it has ebbed from $12.6 billion to $8.5 billion, $4.5 billion, and finally to $173 million in the most recent quarter.
It would be a big enough challenge if the company’s core business was in good shape as it spent billions on building the Metaverse. But it’s not. Meta Platforms is facing the pressure that other Internet companies dependent on advertising are facing. But it has also generated some of its own unique problems. For example, “Reels,” short-form videos on Instagram intended to compete with TikTok looks to be cannibalizing revenue from other ad spaces that show higher rates of monetization. Right now Reels was a drag of an estimated $500 million in the third quarter and CEO Zuckerberg said it could be as much as 18 months before that changes.
Investors need to ask themselves what it would take for Meta Platforms to change course–by fixing its core Facebook and Instagram businesses and by developing a credible plan for revenue from the Metaverse that doesn’t require years of open-ended spending. Looking at Metaverse competitors, such as Roblox (RBLX), and potential competitors such as Disney (DIS), Meta Platforms doesn’t seem to be getting good value for all its spending.
As soon as you ask this question, investors run right into what I’d call the Mark Zuckerberg problem. Due to the company’s stock structure, Zuckerberg is in control of Meta Platforms for as long as he wants to be. And he can pursue his Metaverse dreams with as much company money as he deems fit.
Quite frankly, I’m not sure if I’d believe him if Zuckerberg said tomorrow that he’s seen the error in his strategy and is taking the company on a conservative course that preserves cash and grows the core business. The departure of long-time chief operating officer Sheryl Sandberg doesn’t add to my confidence in management at Meta Platforms.
But I am sure that absent that “road to Damascus” moment, I’m looking for things to get worse at Meta Platforms before they get better.
