During the height of the pandemic tech stock bubble in late 2021, Facebook (also the parent of Instagram and WhatsApp) announced its rebrand to Meta. The new business entity -- Meta Platforms (META 0.27%) -- had a terrible 2022, and its newfound commitment to building a "metaverse" business is largely to blame. The stock has notched an impressive rally in recent months, but remains down 50% from all-time highs as of this writing.
Meta CEO Mark Zuckerberg has been changing his tune on the metaverse as of late, and for good reason. Despite the overall company's name change, the metaverse business -- currently filed under the "Reality Labs" line item -- is an almost insignificant part of the overall company's revenue. Here's how little it brought in last year.
A tiny segment gobbling up cash
Meta hauled in $32.17 billion in revenue during the fourth quarter (October through December) of 2022. $31.25 billion of that total -- or 97.1% -- was advertising revenue generated from Meta's core social media apps (Facebook, Instagram, and WhatsApp). As you can see from the chart below, Reality Labs (virtual reality headsets and the sale of software, collectively the company's bet on the metaverse) was an insignificant revenue generator. It brought in just $727 million, or 2.3% of revenue.
$184 million was filed under "other," most of it related to WhatsApp business messaging services and other software revenue generated on its social media apps.
Data source: Meta.
The main takeaway here, though, is how tiny Reality Labs is right now. For all the hype, this is an almost insignificant part of Meta's business. In fact, the segment actually brought in 17% less money in the fourth quarter of 2022 compared to Q4 2021, due to lots of consumer spending on the affordable Quest 2 virtual reality headset in 2021. Sales of that headset have since cooled off, and Meta's more recent release (the Meta Quest Pro) is a more premium piece of hardware with a $1,500 price tag.
To make matters worse, Reality Labs is also reporting steep losses. Reality Labs had an operating loss (profit or loss after business expenses like payroll, research and development, and marketing are paid) of $4.28 billion in Q4. When subtracting Reality Labs, Meta's operating profit margin increases from 19.9% (decent) to 34% (highly lucrative).
|
Meta Financial Metric |
Total Meta Business |
Meta Excluding Reality Labs |
|---|---|---|
|
Revenue |
$32.17 billion |
$31.44 billion |
|
Operating profit |
$6.4 billion |
$10.68 billion |
|
Operating profit margin |
19.9% |
34% |
Data source: Meta.
In other words, shutting down Reality Labs would reduce Meta's revenue by just 2% but give a nearly 70% boost to operating profit.
Investors are cheering the "year of efficiency"
Given the drain the metaverse is having on Meta right now, investors are cheering Zuckerberg calling 2023 the "year of efficiency." Cost cutting is underway at the company, including at Reality Labs, which means profit margins could make a sizable rebound. Meta stock is up 45% so far in 2023.
Shares now trade for 20 times trailing 12-month earnings, or 24 times free cash flow, as of this writing. After the big rally, I rank Meta stock as a hold. I'm waiting for more information on cost-cutting progress before I'd consider buying more.
