(Bloomberg) — Meta Platforms Inc fell nearly 20% in premarket trading after CEO Mark Zuckerberg told investors to be patient with the social media giant’s ballooning investments in unproven bets at an already difficult time for digital advertising companies.
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The company’s shares tumbled before the New York stock exchanges opened on Thursday after it gave a disappointing quarterly revenue forecast. In a call on Wednesday, Zuckerberg sought to justify Meta’s inflated costs to fund its version of virtual reality, the metaverse, as well as the artificial intelligence that is fueling major changes in its social networks.
Investors, who have already sent the stock down 61% this year, aren’t buying it yet. Zuckerberg said he was confident Meta’s biggest bets in areas such as short video, business messaging and metaverse were headed in the right direction — he couldn’t say for sure how big the payout would be.
“I think we’re going to solve each of those things at different intervals of time,” Zuckerberg said. “And I appreciate patience and I believe those who are patient and invest with us will end up being rewarded.”
It’s proving tough to sell when a company expects its already sluggish revenue to be lower than analysts expected, and costs to be more. On Wednesday, Meta said third-quarter revenue was down 4.5% from a year earlier, only the second time the company’s sales had ever fallen — the first being the last quarter. In the last three months of the year, Meta expects this trend to continue. The company’s forecast for the fourth quarter came at the bottom line of analyst estimates.
Meta now expects total expenses for this year to be $85 billion to $87 billion. The company said on Wednesday that in 2023 that number will rise to $96 billion to $101 billion.
Read more: Meta falters as sales forecast shows depth of ad market weakness
Meta is already grappling with both a downturn in marketer spending due to economic uncertainty, and a change in Apple Inc’s privacy policy. That made all social media advertising less effective. The company cut costs by slowing hiring and narrowing priorities to focus on keeping its social media platforms relevant and expanding its virtual reality offerings.
The company, which changed its name from Facebook to Meta a year ago, is also betting heavily on the virtual reality-fueled metaverse gathering places that Zuckerberg believes will host the future of work and communication. This effort is losing billions from Meta, and the company expects to lose more money in the metaverse business next year.
Meta isn’t the only internet company with a weak ad market; Both Alphabet Inc. and Snap Inc. For a similarly strong blow with lackluster results. It’s the only company that is fixing how its social media platforms work while spending about one in every $10 they make in sales on a hypothetical future that’s still years away.
In the past year, Meta has changed the Facebook and Instagram experiences to show more algorithmically selected content and fewer posts from the people users follow. It also prioritizes short videos, called Reels, in response to the popular TikTok app from ByteDance Ltd.
Meta’s legacy social media products must remain popular enough to generate ad revenue that will fund Zuckerberg’s metaverse vision. In the third quarter, 4% more people spent time on Meta platforms per day, compared to the same period last year, with 2.93 billion daily active users. Monthly, the tech giant saw 3.71 billion active users of the family of apps, which also includes Messenger and WhatsApp.
On Wednesday, the company touted that Instagram has passed 2 billion monthly active users, and said those people spend more time watching Reels — and marketers spend advertising there, at an implied rate of $3 billion a year in revenue. But Reels is slipping in revenue, to $500 million last quarter, as the newer product breaks up other ad spaces that generate income at faster rates. Zuckerberg said it could take 18 months before that changes.
“What investors are feeling right now is that there are too many demo bets versus the underlying bets,” Brent Thill, an analyst at Jefferies LLC, said on the earnings call with Meta executives.
Zuckerberg has asked for patience before. In 2015, investor questions focused on when WhatsApp, Instagram, and Messenger will make money. The difference at the time was that those apps already had hundreds of millions of users each.
“Meta needs to transform its business,” said Debra Aho Williamson, an analyst at Insider Intelligence. “As Facebook Inc., it was a revolutionary company that changed the way people communicate and the way marketers interact with consumers. Today it is no longer that innovative.”
(Updates with pre-market trading in second paragraph.)
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