When Meta Platforms (META -3.24%) updated investors with fiscal 2022 first-quarter results on Wednesday, April 27, it revealed revenue growth that's slowing significantly. The company formerly known as Facebook changed its name to signal its changing focus to become a metaverse company.
The massive shift from social media giant to metaverse company is already getting expensive as it ramps up investments in equipment and personnel. But management is telling investors it will lift its foot off the pedal to balance the slowing sales.
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Meta Platforms is facing considerable headwinds in 2022
In its recently completed quarter, which ended on March 31, Meta's sales increased by just 7% year over year. That was the slowest rate of growth in the last decade. The deceleration came amid difficult comparisons with the prior year's quarter, when revenue jumped by 47.6%. What's more, policy changes by Apple (AAPL -1.57%) are making it hard to capture user information, which reduces Meta's ability to sell targeted advertising.
FB Revenue (Annual YoY Growth) data by YCharts
As a result, Meta's price per advertisement fell by 8% in March's quarter. Decreasing precision in advertising lowers the return on the investment. Unsurprisingly, marketers are unwilling to pay as high a price for advertising that delivers lower returns. Consider that with targeting, most of your ads are shown to qualified customers -- those who are more likely to purchase your product or service. Less of your spending gets wasted on showing vegans advertising for a steak restaurant.
While Meta works on adjusting to the changes from Apple, management expects revenue of $29 billion at the midpoint for Q2. If it hits that target, it would mean revenue remained flat from last year, when it also earned $29 billion in the quarter ended in June.
Calibrating expectations for the metaverse
With less money coming in, management is doing the prudent thing and lowering spending. It told investors on April 27 that it would reduce expenses in 2022 to $89.5 billion, down from the earlier estimate of $92.5 billion, both at the midpoint.
Since the rebranding into Meta Platforms, the company has reported results on two segments, Family of Apps and Reality Labs. The latter houses the company's investments in augmented and virtual reality and the related hardware, software, and content. The Reality Labs segment generated revenue of $695 million in Q1 at an operating loss of $2.96 billion.
Meta's results in 2021 were better than management expected, so it accelerated some of the investments on the transition to the metaverse. However, now that Meta faces meaningful headwinds, it plans to pull back spending on the change.
Shareholders should be encouraged that management is calibrating investments based on available cash flow. It's not on a set path; it is willing to deviate. Nevertheless, the next few years are likely to be volatile for the stock as it pivots from social media, where it has proven absolute dominance, to the metaverse, where it has unknown prospects.
