Zuckerberg burns some goodwill on Wall Street as he plows forward with the metaverse

By Therese Poletti

Meta Platforms Inc. Chief Executive Mark Zuckerberg has wiped away some of the goodwill he recently regained from Wall Street with news of the company's big capital-spending plans - which include the metaverse.

The social-media giant's strong first-quarter earnings Wednesday were marred by a slightly weaker revenue outlook and plans to increase capital spending for 2024 to a range of $35 billion to $40 billion, mostly fueled by hardware infrastructure build-outs for artificial intelligence.

But investors were clearly also concerned that Meta's (META) spending will include a lot more on virtual and augmented reality. The first question from analysts on Wednesday's conference call tried to get Zuckerberg to somehow quantify "the length and depth" of the investments with respect to AI and Reality Labs, which is Meta's VR and AR unit.

"You enter this period where, I think kind-of-smart investors see that the product is scaling and that there's a clear monetizable opportunity there even before the revenue materializes," Zuckerberg said. "And I think we've seen that with Reels and with Stories and with a shift to mobile, and all these things where basically we build out the inventory first for a period of time and then we monetize it."

Investors will remember that it was only in October 2022 that one of Meta's investors, Altimeter Capital, wrote a scathing letter to Zuckerberg calling for the company to get fit and focused. The letter came two weeks after Meta introduced a $1,500 VR headset amid few signs that its metaverse apps, such as "Horizon Worlds," were catching on.

Also read: Is Mark Zuckerberg taking the first step toward turning Facebook into Yahoo 2.0?

On Wednesday, Meta's shares plunged 16.5% in after-hours trading, putting it on course to lose over $200 billion in market cap if those losses hold up in Thursday trading.

Zuckerberg tried to highlight the hopeful aspects of the Reality Labs business, pointing out that the company's smart glasses that it sells in partnership with Ray Ban are sold out in many styles and colors. The smart glasses have a camera for recording video and audio that users can post to social media, but the AI component of the glasses seems marginal at best. The smart glasses, which Zuckerberg is now referring to as "wearable AI," can be controlled by some voice commands.

But even so, in the first quarter, Reality Labs reported operating losses of $3.8 billion on revenue of $440 million. Meta saw strong overall revenue growth of 27% and a huge increase in net income, as employee headcount was down 10%, and clearly Zuckerberg is using that extra cushion to funnel more money into his pet metaverse obsession.

On the other hand, the company's spending on AI hardware and software infrastructure, which possibly includes developing its own chips, appears to be a better investment. Zuckerberg said 30% of the posts on Facebook are now delivered by its AI recommendation system and more than 50% of the content on Instagram is AI-recommended. AI is becoming a "huge part of how we create value for advertisers," he said.

Many of the analysts who remain bullish on Meta will point to the company's strong revenue and profits as reasons to avoid an anticipated sell-off on Thursday. But it seems as if Zuckerberg's "Year of Efficiency" has ended, and Wall Street might want to keep him and Meta on a short leash.

-Therese Poletti

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04-27-24 0659ET

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