Investors threw an absolute fit over Meta Platforms' (META 0.20%) spending spree on the metaverse this year. As pressure mounted on its digital ad empire (primarily Facebook and Instagram) and its outlays on virtual reality (VR) technology ramped up, Meta's profit margins cratered. In response, traders bid shares of the mighty social media empire down by nearly 70% from their peak.  

Investors still have high anxiety about the company's lavish spending goals on the metaverse for 2023, too, and many have been making it clear to CEO Mark Zuckerberg that they'd prefer Meta renew its focus on its bread-and-butter businesses. Not to worry: Meta is doing just that.

A brief history of Meta's 2022 slump

Meta's revenue growth came to a screeching halt this year. Through the first nine months of 2022, sales were flat year over year at just over $84 billion.

Blame a deteriorating economy (which hurts advertising activity), as well as increased social media competition (from TikTok and others) and the improvements Apple made to its user-privacy protocols, which shook up the digital ad market. Apps on Apple devices are now required to ask users whether they want to allow their digital activity to be tracked, and fewer are agreeing to that. (Apple's also promoting its own digital ad business, but that's a different topic.) Apps like Facebook and Instagram have historically tracked users' online activity so that they can better target ads to them. However, with so many Apple device users opting out, Meta ads are now a bit less valuable to marketers.

The kicker, though, is expenses. While its revenue was flat, Meta's total costs and expenses surged to nearly $62 billion through the first three quarters of 2022, up from $50 billion in the prior-year period.

The result? Lower profits. In Meta's case, net income got a 36% haircut to "only" $18.5 billion through the first nine months of 2022.

Critics have been quick to blame Zuckerberg's vision for the metaverse as the reason for this expense-driven implosion. After all, Meta's capital expenditures (big-ticket spending on property and equipment) are up by 68% so far in 2022 to $22.4 billion (a $9.1 billion increase over 2021). The assumption is that most of that money went toward investments in developing VR hardware and building new data centers to support VR experiences. Meta's Reality Labs segment reported an operating loss of $9.4 billion this year, so the simple math would seem to support the theory that Meta has a metaverse spending problem.

This isn't exactly true.

Meta sets the record straight

What is true is that Meta is spending lots of money on property and equipment, in particular advanced data center hardware (like Nvidia's new GPUs that accelerate AI development). Meta isn't alone in this department, but it nonetheless is taking heat for it from investors because, well, it's Meta. 

However, in a recent blog post, Meta said that 80% of its recent spending was actually on its core "family of apps" -- Facebook, Instagram, and WhatsApp -- not on Reality Labs. That includes capital expenditures for advanced data center features.

You see, it's not just VR and the metaverse that need AI and other advanced computing technology. Meta knows its social media apps are the parts of the company making money right now, and it wants to keep it that way. To support new video formats and business features within Facebook, Instagram, and WhatsApp, new data center equipment is needed. Thus, the bulk of this year's spending was allocated to social media, not the metaverse.  

Meta management says the spending spree will continue in 2023 but expects the bulk of those outlays will continue to be funneled to its core social media apps. That doesn't mean it will dial back its metaverse spending, but it's not the metaverse that's tanking Meta's profitability during this period of elevated investment. For comparison, Zuckerberg and company expect total expenses to be in the range of $96 billion to $101 billion in 2023, up from an expected $85 billion to $87 billion for 2022.

Heavy spending is actually necessary for Meta

As uncomfortable as it may be, Meta needs to spend heavily now. Weaknesses in its digital ad business were exposed by disruption and competition this year, and Meta is at a disadvantage. Other tech giants (like Apple) have more unified ecosystems of hardware and software. If Meta is to keep pace and continue growing over the long term, it needs to develop the same infrastructure. That means solidifying its computing base (data centers) for its existing apps while simultaneously investing in the future (VR headsets and VR apps). 

That all adds up to what Meta shareholders are viewing as an uncomfortable amount of spending. However, don't be fooled into thinking Meta is primarily spending on its metaverse aspirations. On the contrary, Facebook, Instagram, and WhatsApp are still soaking up the bulk of its budget.