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Meta has his Third quarter earnings report after stock markets closed on Wednesday and reported $27.7 billion in revenue. While the tech giant did live up to expectations, it was still a 4% year-over-year revenue decline. This marks a second consecutive quarter of decline. Meta itself believes this trend will continue into the fourth quarter, setting targets that are lower than expected.
The market did not react well to this news and Meta’s current game plan. Stock prices have fallen about 30% overnight and are down about 70% so far.
While the topline numbers suggest Meta is on track, other stats paint a bleaker picture. Meta has doubled its capital expenditures compared to Q3 last year. Coupled with reduced advertiser spend, rising energy prices impacting data centers and supply chain issues, Meta’s margins are shrinking rapidly. In the third quarter of 2021, Meta brought in $9.55 billion after operating and capital costs. This quarter, that figure has fallen to $173 million — a loss of more than 98% year-over-year.
Improvements to the artificial intelligence (AI) technology, algorithm, and manufacturing of the Meta Quest Pro all contributed to the company’s growing budget. Reality Labs, which is developing the technology underpinning its metaverse plans, has lost $9.4 billion so far in 2022.
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When asked whether or not Meta lived up to his own expectations, Mark Zuckerberg was supportive of the company’s work. Zuckerberg believes Reality Labs’ efforts in Horizon Worlds, VR, AR, and “wrist-based neural interfaces” to control his plagued AR glasses have a long way to go, but he believes Meta is on the cutting edge of the game. developing these immersive technologies.
“I think this will be fundamental for the future. Nothing we see suggests this won’t be the case,” Zuckerberg argued.
Zuckerberg and investors seems to have a clear division between them. Jefferies analyst Brent Thill argued on the earnings call that investors believe Meta is making “too many experimental bets versus proven bets.”
When a company grows, investors will pay much more for stock than what the underlying company makes today. This premium can be measured as a ratio of a company’s enterprise value — the total value of a company’s stock and debt — to its earnings before interest, taxes, depreciation and amortization (EBITDA). This is often referred to as an EV/EBITDA multiple. Growing companies can trade at 10, 20 or even 30 times their current earnings.
At its peak in 2013, Meta – then Facebook – was trading at about 28 times EV/EBITDA multiple. After the third quarter earnings call, Meta is trading at about 5 times its EBITDA. This shows that investors see Meta as a mature company in its current form, not as a growth engine.
While the metaverse has game-changing potential, it’s not clear that investors feel the need to fund something unproven that might not be ready for another five years or more.
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