Meta shares tumble after warning of ‘near-term challenges’ to revenue

A deepening slowdown and disappointing revenue forecast sent Meta shares reeling on Wednesday as Big Tech groups continue to face a reckoning from a digital advertising slump and tough macroeconomic conditions.

Shares in Meta dropped more than 19 per cent in after-hours trading, wiping more than $65bn off its market capitalisation, after the world’s largest social media platform said it expected its current-quarter revenue to be in the range of $30bn-$32.5bn, compared with analyst expectations of $32.2bn.

On top of wider macroeconomic woes, Meta, the parent of Facebook and Instagram, faces a confluence of challenges, including rising competition from rivals such as short-form video app TikTok, which is owned by China’s ByteDance, and difficulties in targeting and measuring advertising due to Apple privacy policy changes.

“While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth,” said Mark Zuckerberg, Meta’s founder and chief executive.

Net income in the third quarter more than halved from a year ago, down 52 per cent to $4.4bn, below consensus estimates for $5bn, according to S&P Capital IQ.

Revenues fell 4 per cent to $27.71bn, its slowest pace of growth since going public in 2012, after a 1 per cent decline last quarter. This was just above analyst estimates of a 5 per cent drop to $27.4bn. 

Meta is the latest Big Tech group to post lacklustre results and an even bleaker outlook as a wider economic slowdown and soaring inflation continue to batter businesses that rely on advertising, with brands tightening their belts and slashing marketing spend.

Shares of Google parent Alphabet were down more than 8 per cent on Tuesday after it reported an unexpectedly severe slowdown in its core search ads business, while Snap, which owns the smaller social media platform Snapchat, fell 28 per cent on Friday after posting its slowest pace of growth.

Meta has faced particular scrutiny for expanding headcount rapidly during the coronavirus pandemic boom times and pouring investment into Zuckerberg’s vision of building a digital avatar-filled world known as the metaverse, alongside other virtual and augmented reality projects that are not expected to bear fruit for many years. The company is already experiencing disruption and challenges as part of the pivot, according to previous reports from the Financial Times.

Revenues from Reality Labs, its metaverse unit, nearly halved in the third quarter to $285mn, Meta said on Wednesday. Total losses from Reality Labs’ operations stood at $3.7bn, compared with $2.6bn a year ago. In its earnings statement on Wednesday, the company said it anticipated that Reality Labs’ operating losses in 2023 would “grow significantly year-over-year”.

In recent months, Meta has sought to cut costs and freeze most of its hiring, as investors begin to agitate for changes. On Wednesday Meta said that it was “making significant changes across the board to operate more efficiently” and had “increased scrutiny on all areas of operating expenses”.

But it cautioned that “these moves . . . will take time to play out in terms of our overall expense trajectory” and that certain steps, such as shrinking its office space as more workers go remote, would lead to “incremental costs in the near term”.

It estimated 2022 total expenses to be in the range of $85bn-$87bn, narrowing from its prior outlook of $85bn-$88bn. However it said it anticipated 2023 expenses in the range of $96bn- $101bn.

On a call with analysts, Meta faced concerns in particular over its estimate that capital expenditure in 2023 would be between $34bn-$39bn, higher than expected.

Zuckerberg said the leap in capital expenditure was largely due to the company investing in building out its artificial intelligence capabilities, such as AI discovery and recommendations models, which he hopes will drive users to watch Reels, its clone of TikTok’s short video format.