Zuckerberg asks for ‘patience’ as Meta’s costs scare investors

Zuckerberg asks for ‘patience’ as Meta’s costs scare investors

(Bloomberg) — The chief executive officer of Meta Platforms Inc. Mark Zuckerberg asked investors for patience with the social media giant’s growing investments in unproven bets at an already challenging time for digital advertising companies.

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The company’s shares fell about 20% in premarket trading before markets opened in New York on Thursday after it gave a disappointing quarterly revenue forecast. On Wednesday’s call, Zuckerberg tried to justify Meta’s heavy spending to fund his version of virtual reality, the metaverse, as well as the artificial intelligence that has fueled major changes to his social networks.

Investors, who have already dropped shares by 61 percent this year, are not buying them for now. Zuckerberg said he was confident Meta’s biggest bets in areas like short videos, business messaging and the metaverse were headed in the right direction — he just couldn’t say for sure how much the payoff would be.

“I think we’re going to address each of these things in different periods of time,” Zuckerberg said. “And I appreciate patience and I think those who are patient and invest with us will be rewarded in the end.”

That’s proving a tough sell when the company expects its already declining revenue to be lower than analysts expected and costs to be higher. Meta said on Wednesday that third-quarter revenue fell 4.5% from a year earlier, marking only the second time the company’s sales have fallen — the first in the last quarter. In the last three months of this year, Meta expects that trend to continue. The company’s fourth-quarter forecasts came in at the lower end of analysts’ estimates.

Meta now expects total costs for this year to be $85 billion to $87 billion. In 2023, that number will rise to an expected $96 billion to $101 billion, the company said Wednesday.

Read more: Meta falls as sales forecasts show depth of ad market weakness

Meta is already grappling with reduced marketer spending due to economic uncertainty and Apple Inc.’s change in privacy policy. which made all social media ads less effective. The company has cut costs by slowing hiring and narrowing priorities to focus on maintaining relevant social media platforms and expanding its virtual reality offerings.

The company, which changed its name from Facebook to Meta a year ago, is also betting on the metaverse, the virtual-reality-fueled gathering places that Zuckerberg thinks will host the future of work and communication. The effort is losing Meta billions, and the company expects to lose more money on metaverse deals next year.

Meta is not the only Internet company suffering from a weak advertising market; and Alphabet Inc. and Snap Inc. are affected by similar poor results. It’s the only company overhauling the way its social media platforms work, spending roughly one out of every $10 it generates in sales on a virtual future that’s still years away.

Over the past year, Meta has changed the Facebook and Instagram experiences to show more algorithmically curated content and fewer posts from people users follow. It also prioritizes short videos, called Reels, in response to ByteDance Ltd.’s popular TikTok app, which captured users’ time and accustomed them to a feed of vertical videos based on specific interests.

Meta’s legacy social media products must remain popular enough to generate advertising revenue to fund Zuckerberg’s metaverse vision. In the third quarter, 4% more people spent time on Meta platforms each day, compared to the same period last year, with 2.93 billion daily active users. The tech giant had 3.71 billion monthly active users for its family of apps, which also includes Messenger and WhatsApp.

The company said Wednesday that Instagram has surpassed 2 billion monthly active users and said those people are spending more time watching Reels — and marketers are spending on advertising there, at an implied rate of $3 billion in annual revenue. But Reels is pulling in revenue, to the tune of $500 million in the most recent quarter, as the new product cannibalizes other ad spaces that monetize at faster rates. It could be as long as 18 months before that changes, Zuckerberg said.

“The way investors feel right now is that there are too many experimental versus proven core bets,” Brent Thill, an analyst at Jefferies LLC, said in an earnings call with Meta executives.

Zuckerberg has previously asked for patience. In 2015, investor questions focused on when WhatsApp, Instagram and Messenger would make money. The difference was that those apps already had hundreds of millions of users each.

“Target needs to turn its business around,” said Debra Aho Williamson, an analyst at Insider Intelligence. “Like Facebook Inc., it was a revolutionary company that changed the way people communicate and the way marketers communicate with consumers. Today it is no longer that innovative revolutionary.”

(Updates with pre-market trading in another paragraph.)

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