Thursday brought a mix of news to stock market investors, some good and some bad, and it reflected the interesting dichotomy between two different areas of the market. On one hand, old-economy stocks fared fairly well, sending futures contracts on the Dow Jones Industrial Average (^DJI -0.11%) sharply higher. However, innovative growth companies fared less well, and that sent Nasdaq Composite (^IXIC 0.10%) futures down again.
The biggest declines among Nasdaq stocks came from Meta Platforms (META -0.52%) and Align Technology (ALGN 0.61%). There are a lot of differences between social media and orthodontics, but the thing the two companies have in common is that they soared during the bull market in growth stocks in 2021 and have seen massive declines since then. Both just released their latest financial reports, and below, you'll learn more about what they said and why shareholders aren't happy about it.
The metaverse is turning into a money pit for Meta
Shares of Meta Platforms plunged 23% in premarket trading Thursday morning, building on losses that started late Wednesday after the social media company reported its third-quarter financial results. Investors have been skeptical about the Facebook parent's shift toward an emphasis on the metaverse, and thus far, Meta hasn't been able to do much to offer any concrete reassurances about their fears.
Meta's numbers were ugly. Revenue was down 4% year over year to $27.7 billion. A massive 19% rise in expenses, however, caused operating income to plunge a much steeper 46%. The hit to net income was even more severe, weighing in at $4.4 billion, down 52% from year-ago levels. Earnings came in at a disappointing $1.64 per share.
Metrics for Facebook, Instagram, and Meta's other social media properties remained solid, with overall monthly active people using network offerings climbing 4% to 3.71 billion. Yet the environment for online advertising was extremely weak. Meta managed to deliver 17% more ad impressions in the third quarter than it did during the same period in 2021, but it got an average of 18% less per ad than a year ago.
Yet what seemed to spook investors the most was Meta's obstinate insistence on plowing ahead with its ambitious and expensive foray into the metaverse. The company said it expected total expenses to stay on the rise, going from between $85 billion and $87 billion in 2022 to between $96 billion and $101 billion in 2023. The Reality Labs division is expected to see even larger operating losses in 2023.
Meta's comments suggested that short-term factors like weakness in the advertising sector could quickly give way to better times ahead. Yet the larger concern is that the entire metaverse strategy could backfire on the company. CEO Mark Zuckerberg is asking for patience as the strategy plays out, but pressure from institutional investors is building for Meta to take a more measured approach that recognizes the financial difficulties in the current market environment.
Align stock gets face-punched
Elsewhere, shares of Align Technology dropped 17% in premarket trading. The maker of Invisalign orthodontic devices failed to inspire investors with its third-quarter financial results, and the stock has now lost roughly 80% of its value since its highs late last year.
Just about all of Align's financial numbers were weak. Revenue for the quarter fell 12% year over year to $890 million, with similar declines in sales volumes of its clear aligners. Align's imaging and related services revenue also dropped 12% from year-ago levels. Although foreign exchange fluctuations were responsible for about half the yearly decline, Align also cited macroeconomic uncertainty and weaker consumer confidence for the pullback.
Align is doing its best to keep its core business running smoothly, with new case starts among teenage patients climbing 13% from where they were three months ago. Yet to the extent that Align is relying on its technological innovation to drive growth, tough economic conditions could prove to be an impediment in getting dental professionals to make capital commitments to upgrade their equipment right now.
When the economy gets tough, investors lose patience with growth-oriented companies that can't adapt. That doesn't mean that Align's or Meta's strategies won't work in the long run, but it does reflect why share prices can change so quickly when news comes out.
