Mark Zuckerberg says Meta will cut spending after Q1 results

Mark Zuckerberg told the world last October that he was all in on the metaverse and the effort would only get more costly over time. Now that his company’s stock price has been hammered in recent months, he is backtracking on that rhetoric.

Meta will “slow the pace of some of our investments” due to “our current levels of growth,” Zuckerberg said during the company’s first-quarter earnings call on Wednesday. Meta’s first-quarter earnings were $7.5 billion, down 21% from a year earlier. Revenue rose 7% to $27.9 billion, the slowest growth rate since the company went public a decade ago. Its target spending range for 2022 was lowered by $3 billion.

Make no mistake: Zuckerberg still spends billions a year building devices and software for the metaverse, a concept he believes will eventually be as important as the mobile internet. Meta’s Reality Labs division, which makes the Quest VR headset and future AR glasses, has about 17,000 employees and lost nearly $3 billion in the last quarter alone. The problem is that Meta investors are uncomfortable right now with this level of spending, especially when the gain is years away.

Sometimes the price of a stock tells the story. In the case of Meta, its price fell almost 50%, evaporating the last five years of growth, since changing his name on Facebook last October. It was then that Zuckerberg revealed that he was already spending $10 billion a year on Reality Labs and that he expected investment to grow although he hadn’t seen any. return before at least the second half of this decade.

If its core business, advertising-driven social media, grew as it has in the past, investors might have responded positively to the Meta pivot. But the timing couldn’t have been worse: Facebook is growing slower than ever, thanks in large part to young users fleeing the service. TikTok is eating away at time spent on Facebook and Instagram. And Apple’s ad tracking changes have already cost Meta more than $10 billion in lost revenue. Meanwhile, regulators have blocked Zuckerberg’s ability to make big, transformative acquisitions in social media that could kickstart growth.

Facebook continues to grow, but slower than ever. After reporting its first-ever dip in daily users in Q4 2021, the blue app managed to grow daily users by just 4% to 1.96 billion in the last quarter, while daily users on Instagram, WhatsApp and Facebook increased slightly from 2.82. billion to 2.87 billion. With expectations already low on Wall Street, Meta’s stock price soared more than 15% after reporting better-than-expected first-quarter earnings per share.

“Meta’s advertising business continues to face some very real challenges,” said Jasmine Enberg, principal analyst at Insider Intelligence. “Facebook, of course, is no stranger to obstacles, but iOS changes are the first direct threat to its advertising business. Combined with the rise of TikTok, brand safety issues and a change of social media user behavior, there is a perfect storm heading straight for Meta ad revenue.

It is clear that in the short term, Zuckerberg believes that copying TikTok will revive its growth. He said Wednesday that the company’s short-form video product, Reels, accounts for 20% of time spent on Instagram, and video consumption already accounts for more than half of time spent on Facebook. Meta is the first to monetize Reels with ads, but it follows the same playbook Zuckerberg used to successfully copy Snapchat’s Stories feature.

For Reality Labs, Zuckerberg said the next major hardware product will be a high-end mixed reality headset named Cambria later this year. He said Cambria will focus on “business use cases and possibly replacing your laptop or work setup.” (Apple soon has its own mixed reality headset that, if I had to guess, Zuckerberg wants to get ahead of it.)

Apart from new hardware, Meta is preparing a web version of its Horizon social platform which currently only exists on the Quest headset. This will put Horizon in more direct competition with 3D and social gaming apps like Fortnite, Roblox, and Rec Room. Zuckerberg said Horizon would also be integrated more tightly with the Quest in an upcoming software update, solidifying it as a crucial bet. Meta takes a good percentage of the virtual goods sold in Horizon but has not yet introduced an advertising system.

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