For an agonizingly long time, it seemed that Meta Platforms (META 1.40%) could do nothing right. That's changed dramatically. The company delivered better-than-expected revenue and earnings with its second-quarter results, announced after the market close on Wednesday. It provided Q3 guidance that topped Wall Street's estimates as well.
Despite the big turnaround for Meta, not everything is sunshine and roses. CEO Mark Zuckerberg said in the company's conference call that the market is sending a "sobering signal." Here's what that signal is and what it could mean for Meta stock.
Underwhelming response
Zuckerberg wasn't talking about the market's reaction to Meta's core social media business. Things are looking up on that front. However, he admitted that there has been an underwhelming response to the company's metaverse efforts.
After talking about exciting developments with Reels, Threads, and generative AI, Zuckerberg transitioned by stating, "And then the metaverse stuff." He went on to explain that the market is sending the aforementioned "sobering signal," with users not adopting metaverse-related technology very quickly.
However, Zuckerberg isn't adjusting Meta's course based on the market response. He argued that Meta thinks that it will still be a leader in the metaverse. The company believes that its long-term thesis about the technology remains on target.
Meta continues to focus on two primary technological waves: artificial intelligence (AI) and the metaverse. Zuckerberg said, "We've been working on both of these two major priorities for many years in parallel now. And in many ways, the two areas are overlapping and complementary."
Two potential scenarios for Meta
The main problem for Meta is that its metaverse efforts are losing a lot of money right now. Its Reality Labs unit posted an operating loss of $3.8 billion in Q2. So far, the cumulative loss has surpassed $40 billion.
And there isn't any good news on the immediate horizon, either. Meta expects operating losses for Reality Labs will increase in full-year 2023.
In light of this, I think there are two starkly different potential scenarios for Meta's future. One is that the bleeding for Reality Labs continues until so much pressure builds that the company is forced to largely abandon its metaverse vision.
The other scenario is much more optimistic. In it, Zuckerberg's confidence proves to be warranted. Most of the 1 billion-plus people in the world who wear glasses switch to smart glasses. TV, PC, and mobile experiences become more immersive with virtual reality. Meta successfully monetizes the metaverse, and its revenue, profits, and share price skyrocket.
A lottery ticket
Zuckerberg knows that many investors simply don't connect with his metaverse vision. He even acknowledged in the Q2 call, "I can't guarantee you that I'm going to be right about this bet." However, he quickly added, "I do think that this is the direction that the world is going in."
So what should investors do? I think their main focus should be on Meta's overall business. The company's advertising revenue is again growing. Meta remains highly profitable. It has opportunities to boost profits using AI to more effectively monetize its apps. The new Threads app holds significant moneymaking potential. Meta's largely open-source approach to AI could reap tremendous benefits over the long term.
What about Zuckerberg's metaverse commitment? Look at it like a lottery ticket. Sure, it could turn out to be a colossal waste of time and money. If Zuckerberg's perspective about the future is even close to being right, though, that lottery ticket could pay off in a huge way.
