Amidst Persisting Financial Setbacks at Reality Labs, Meta Platforms Might Want to Heed the Signals from Apple
Meta Platforms (META -1.65%) stock experienced a setback following its earnings report on Wednesday night. The stock dropped by 3% in after-hours trading, despite surpassing expectations on both revenue and earnings per share. The Facebook owner had seen significant gains in the year leading up to the report, leading to high expectations.
Revenue increased by 19% to $40.6 billion, surpassing the projected $40.29 billion, and earnings per share climbed 37% due to a lower tax rate, reaching $6.03, surpassing the $5.25 anticipation.
However, with the stock price arguably inflated and the growth in the advertising sector showing signs of slowing down, investor focus shifted towards Meta's expenditures in its Reality Labs division. The division, responsible for hardware such as Quest VR headsets, AI infrastructure, and metaverse software, reported a $4.4 billion loss. The division generated only $270 million in revenue for the quarter, indicating that it primarily drains the overall business and contributes negligible revenue to the overall performance.
Time for a Reality Check
Meta formally changed its name to Meta Platforms in 2021, reflecting its expansion beyond the core social media platform and its focus on the metaverse. The move, driven by CEO Mark Zuckerberg, has seen the stock surge past the $1 trillion threshold since then. However, despite Meta's AI tool proliferation, the losses from Reality Labs continue to escalate, with expectations of further growth in 2025.
Apple Abandons the Vision Pro
Meta's significant financial drain in Reality Labs is noteworthy, particularly given its main competitor's decision to abandon its own Reality Labs project. Zuckerberg has identified Apple (AAPL 0.07%) as Meta's primary rival in its quest to dominate the next computing platform.
Initially, both companies seemed to believe in the metaverse, but the vision now appears to be waning given the struggles at Reality Labs and the rise of generative AI. Last week, it was reported that Apple had significantly reduced the production of the Vision Pro mixed-reality headset due to poor consumer response to the expensive device. It also allegedly instructed its assembler to halt work on the product in November, and since its launch in February, Apple has been notably silent about the product.
The difficulties faced by the Vision Pro seem to serve as a warning sign for Meta's own metaverse ambitions, despite Meta's Quest devices being offered at a much lower price point.
Missed Opportunity, Wrong Focus
Zuckerberg was partially correct in predicting that the next major computing platform was on the horizon. While this appears to be true, it's not the metaverse that Zuckerberg had anticipated, but generative AI that has captured the world's attention, resulting in massive investments in products such as Nvidia chips.
Meta Platforms is striving to lead in generative AI, but Zuckerberg's metaverse aspirations seem increasingly unlikely. Scaling back on the metaverse, as Apple has done with the Vision Pro, would undoubtedly save Meta Platforms money, but the extent is uncertain.
However, continuing to maintain Reality Labs as a separate segment may no longer make sense. While Meta Platforms is unlikely to follow Apple's lead, acknowledging the reality of the minimal demand for the metaverse could help Meta Platforms stock recover and move forward as investors remain cautious about increased spending in the segment.
In light of Meta Platforms' continuing losses in its Reality Labs division, investors may be cautious about the company's financial commitment to this area, potentially affecting their decision-making when it comes to investing in Meta Platforms' stock.
The significant financial investment required for developing Meta Platforms' metaverse and the dividends it has yet to yield, coupled with Apple's decision to abandon its own Reality Labs project and the struggles of the Vision Pro, might encourage Meta Platforms to reconsider its focus and allocate its financial resources more strategically.
