[TL;DR]

• Meta experienced a huge investor sell-out causing its shares to drop significantly last week.

• The event followed the company’s release of its third-quarter earnings report, which revealed massive expenses on Meta’s metaverse project, Reality Labs, and a notable drop in profit.

• The company’s market cap has also dropped approximately 74% since then.

• Meta says these expenses year-on-year are likely to increase significantly in 2023. But it plans to balance things out for the long-term overall health of the company.

• CEO Mark Zuckerberg firmly believes in the metaverse's future and encourages investors to be patient.

Story Overview

The Owner of Facebook, Meta, has recently experienced a massive investor sell-off causing its shares to drop significantly. This event was triggered by the results of a report last week detailing Meta’s third-quarter earnings. It revealed that one of the company’s subdivisions lost $3.9 billion in the third quarter of this year. Reality labs, the arm that focuses on creating metaverse tech, has continually run at a loss over the past three quarters. In fact, the losses of that subdivision in 2022 alone have exceeded $9 billion. And its revenue has dropped to $285 million, a 50% decline from the last year.

Analysts And Investors Protest And Meta’s Shares Drop 24%

As expected, the current situation has led analysts to raise concerns on a third-quarter earnings report call with Mark Zuckerberg. Along with other Meta executives, the CEO attempted to convince the analysts that Meta’s metaverse was on the right path.

The analysts do not consider Reality labs a lucrative investment for facebook’s parent because its expenses keep rising. According to CNBC, Meta’s costs spiked year-on-year by 19% in the last quarter, reaching just over $22 billion. By contrast, its revenue dropped by 4%, barely brushing $28 billion year-on-year in the same period. Even more alarming is the fact that profits have also dropped 52% in the third quarter hovering at $4.4 billion.

On receiving the unsettling news, investors withdrew from the company en masse causing Meta’s shares to plummet significantly. By Thursday, its market cap had plummeted 73.5%, resting at $265 billion from last year’s $1 trillion.

Meta's Market Cap 5-Year Chart. Source: Macrotrends.net.

Other Causes of Meta’s Revenue Drop.

Meta’s CEO cited other factors contributing to the current nosedive in the company’s finances during the earning call. According to him, there is no one size fits all approach to everything. Some of the issues he pointed out include: Apple’s 2021 IOS privacy update, which adversely affected Meta’s ability to target ads to consumers. There is also the matter of intense competition from apps like TikTok.

Additionally, the world economy has taken a hit recently with inflation and other macroeconomic factors at play. All these factors have affected businesses’ appetite for ads and marketing campaigns. While Facebook’s parent continues to work at circumventing these issues, its founder believes the long-term saving grace for Meta lies in the metaverse.

Source: Markets Insider - Business Insider

Mark Zuckerberg’s Response To analysts’ Concerns.

In his response to the concerns raised by analysts on the call, CEO Zuckerberg reaffirmed his faith in Reality Labs. An analyst Brent Thill of Jefferies, mentioned that investors are probably uncomprehending the reason behind Meta’s expensive experimentation. However, Zuckerberg insisted that it was not a matter of whether the experiment would work. He affirmed that it is more a matter of how good it will end up being. Meta further revealed in a statement that expenses would likely substantially increase next year. However, it intends to pace its investment in Reality Labs to ensure the company’s long-term operating income’s overall health. Finally, Zuckerberg firmly asserted that those who remained patient with the Reality Labs Investments would be fully rewarded in the future.