Unlike most of its big tech peers, Meta Platforms (META 1.54%) stock soared on its recent earnings report.
The Facebook parent didn't turn in particularly strong numbers. Revenue in the quarter fell 4% to $32.2 billion, and earnings per share plunged 52% to $1.76, though adjusting for restructuring charges, earnings per share were down 18% to $3, which was better than estimates.
Looking ahead to the first quarter, the company expects another modest decline in revenue, a sign of the macroeconomic headwinds in the ad market and its decision to ramp up its short-form video product, Reels, which monetizes at a lower rate than other "surfaces" like news feed and stories.
However, there was something else noticeable about the report and the earnings call that came with it.
CEO Mark Zuckerberg's focus seemed to shift back to the core business, its family of apps, which is made up of Facebook, Instagram, WhatsApp, and Messenger.
Image source: Meta Platforms.
Meta-what
Under Zuckerberg's direction, the company transformed itself a little more than a year ago, changing its name from Facebook to Meta Platforms, signaling that the metaverse would be the primary focus of the business.
Around that time, the company restructured its financial reporting to separate Reality Labs, the division that produces Oculus VR headsets and is focused on the metaverse, from its family of apps segment. That move also revealed Reality Labs to be a smoldering money pit, and it's only gotten worse since then. In the fourth quarter, Reality Labs lost $4.3 billion, capping off a year in which it lost $13.7 billion.
However, like a seasoned politician, Zuckerberg seems to have learned that the best way to deal with bad news is to shift attention. That's exactly what he appears to be doing here.
On the earnings call, the company talked up its investments in artificial intelligence (AI) and cost-cutting and efficiency initiatives such as a more cost-efficient data center architecture. In the report, the company noted that nearly all of its capital expenditures, which primarily go to its data centers, are for its family of apps, rather than Reality Labs.
Zuckerberg's opening statement in the earnings release also omitted any mention of Reality Labs, saying: "The progress we're making on our AI discovery engine and Reels are major drivers of this. Beyond this, our management theme for 2023 is the 'Year of Efficiency' and we're focused on becoming a stronger and more nimble organization."
The Meta chief discussed the company's recent work in the metaverse on the earnings call, but it seemed to take a back seat to Meta's other projects as he summed up the company's priorities by saying, "Alright, so those are the areas we're focused on: AI, including our discovery engine, ads, business messaging, and increasingly generative AI, and the future platforms for the metaverse."
The pendulum swings back
Meta isn't giving up on the metaverse by any means. In fact, it released Quest Pro, its latest headset, at the end of the last year.
However, there are a number of reasons why Zuckerberg's focus seems to have returned to the core business. The metaverse project has fallen flat thus far, not just at Meta but elsewhere as well. Non-fungible tokens (NFTs), a companion market, have plunged in value, and the idea that people want to spend time in virtual worlds has yet to gain salience, while public interest in the metaverse also seems to have evaporated after Zuckerberg initially made it a buzzword. The struggles of the metaverse are also noticeable compared to the level of attention that ChatGPT and generative artificial intelligence have gotten recently, which seems like the kind of transformative technology that actually has practical applications.
The Meta CEO may also be responding to the plunge in the stock. Shares fell roughly 75% in the year after the company changed its name to Meta, and part of the reason for that seemed to be investor fear that Zuckerberg would risk the entire business on his metaverse experiment.
He seems to have convinced investors that isn't true, and that's partly why the stock has soared. The company plans to grow overall profits steadily while investing in Reality Labs. That's a sensible plan, and it doesn't overshadow Meta's high-margin digital advertising business.
The metaverse will continue to spill billions of dollars more in red ink on the income statement, but after Zuckerberg's pep talk, investors are looking at the company through rose-colored lenses. If the advertising business can return to growth, which seems likely with the emergence of Reels, the stock should keep moving higher from here.
