(Bloomberg) — Meta Platforms Inc. Chief Executive Officer Mark Zuckerberg asked investors for patience with the social media giant’s rising investments in unproven bets at an already challenging time for digital advertising companies.
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Shares of the company fell about 20% in premarket trading before stock exchanges opened in New York on Thursday after disappointing quarterly sales forecasts. In a call Wednesday, Zuckerberg attempted to justify Meta’s skyrocketing costs to fund its version of virtual reality, the Metaverse, as well as the artificial intelligence powering 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’s confident Meta’s biggest bets in areas like short-form video, business news, and the metaverse are going in the right direction — he just can’t say for sure what the payout would be.
“I think we’re going to resolve each of these things over different timescales,” Zuckerberg said. “And I appreciate patience and I think those who are patient and invest in us will be rewarded in the end.”
It’s proving to be a tough sell if the company believes its already falling earnings will be less than analysts expect and costs will be higher. On Wednesday, Meta said third-quarter revenue fell 4.5% year over year, only the second time the company’s sales have ever declined — the first being in its most recent quarter. In the last three months of the year, Meta expects this trend to continue. The company’s guidance for the fourth quarter was on the low end of analyst estimates.
Meta now expects total spending for this year to be between $85 billion and $87 billion. For 2023, that number is expected to rise to between $96 billion and $101 billion, the company announced on Wednesday.
Read more: Meta crashes as sales forecast shows depth of ad market weakness
The company, which changed its name from Facebook to Meta a year ago, is also investing heavily in the Metaverse, virtual reality-powered meeting places that Zuckerberg believes will house the future of work and communication. Meta billions are being lost to the effort, and the company expects to lose more money on the Metaverse business over the next year.
Meta isn’t the only internet company suffering from a weak advertising market; both Alphabet Inc. and Snap Inc. have been hammered out on similarly lackluster results. It’s the only company overhauling the way its social media platforms work while spending about a dollar in revenue on a virtual future that’s years away.
Over the past year, Meta has changed the experiences of Facebook and Instagram to show more algorithmically selected content and fewer posts from people that users follow. In response to ByteDance Ltd’s popular TikTok app. it also prioritizes short videos called reels, which have won 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 the ad revenue that will fund Zuckerberg’s Metaverse vision. In the third quarter, with 2.93 billion daily active users, 4% more people spent time on Meta’s platforms each day compared to the same period last year. The tech giant recorded 3.71 billion monthly active users for its family of apps, which also includes Messenger and WhatsApp.
On Wednesday, the company announced that Instagram had surpassed 2 billion monthly active users, saying those people are spending more time watching Reels — and marketers are spending advertising there, at an implied rate of $3 billion per year in revenue. But Reels is trailing $500 million in sales last quarter as the newer product cannibalizes other advertising spaces that are making faster money. It could take up to 18 months for that to change, Zuckerberg said.
“Investors feel right now that there are just too many experimental bets versus tried and tested bets at the core,” Jefferies LLC analyst Brent Thill said on the conference call with meta executives.
Zuckerberg has asked for patience before. In 2015, investor questions focused on when WhatsApp, Instagram, and Messenger would make money. The difference back then was that these applications already had hundreds of millions of users.
“Meta needs to transform its business,” said Debra Aho Williamson, an analyst at Insider Intelligence. “As Facebook Inc., it was a revolutionary company that transformed the way people communicate and the way marketers interact with consumers. It’s not that innovative trailblazer anymore.”
(Updates with premarket trading in second paragraph.)
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