META-morphosis
What’s behind the tailspin of Facebook’s mothership
“I made a mistake,” – this is all that Jim Cramer had to say yesterday as the shares of Meta Platforms, Inc.'s continued their freefall.
Just as a reminder: Meta went from $379.38 per share on August 1st, 2021, to a mere $99 as of today, Friday, October 28th of 2022.
“I was wrong. I trusted this management team. That was ill-advised," Cramer continued. When was the last time Cramer had to do a U-turn of this magnitude… Meta is no laughing matter.
What is going on, you are asking? Meta’s success with its VR headset was a bonanza for game studios but failed to materialize for its own shareholders.
META-stasizing VR?
When the economy was hurting, Meta's stock was shooting through the roof on August 1st, 2021. In the process, Zuckerberg's fortune skyrocketed to $136.4 billion. Did he get carried away? Hardly. Lost touch with reality? Perhaps a little bit.
Meta's entry requirements to join Facebook’s take on the Metaverse, the new 3D world of VR parallel reality, failed to resonate with Facebook users, investors and industry analysts alike.
So far, Meta’s success has been a mixed bag. While the Quest 2 was well received overall, it has failed to translate into revenue for Meta. Gamers are gaming in VR – outside of Facebook and Meta’s other properties.
While the Metaverse is still a way off, the pressure keeps growing. Now that the company's shares went into a tailspin, Facebook panicked and spilled the beans on a new, recalibrated offer.
And now it’s out: there will be a consumer-oriented follow-up to the Oculus Quest VR headset. According to the remarks by Chief Financial Officer, David Wehner, during Meta’s Q3 2022 earnings call, the headset will arrive “later next year” [2023]. Media and analysts refer to it as the “Oculus Quest 3 VR headset”. (While Meta confirmed its plans for the device, the name is pure speculation.)
The results are not pretty (yet)
A look at David Wehner’s slides from Meta’s Earnings Presentation for Q3 2022 raise some very interesting questions.
Meta’s net income plummeted from $11,219 Million of USD in Q4 2020 to a mere $4,395 Million in yesterday’s Q3 2022 financial report.
The diluted earnings per share follow on the same trajectory. They also fell from $3.88 in Q4 2020 to a paltry $1.64 in Q3 2022.
Conversely, Meta’s capital expenditures went up, up, up…
…and up… from $4,544 Million in Q3 2021 to $9,518 Million in Q3 2022. The YTD metric skyrocketed. On the YTD timeline, Meta’s capital expenditures follow the same unsustainable trajectory, rising from $13,703 Million (YTD 2021) to $22,813 Million (YTD 2022 as of Q3 2022).
Let that sink in for a moment: net income and diluted earnings per share are dramatically down. Capital expenditures are skyrocketing. The question is why. (“Why not?“ is not a valid answer.)
Meta seems to be ramping up its compute power in preparation for the Next Big Thing.
If that’s the case, Meta's data centers would be a prime suspect. New builds are always shrouded in secrecy.
Then, there is the renewal cycle of IT expenditures for existing facilities. It seems that Meta might have moved some of it forward (between Q4 2020 and Q3 2022). These sure look like some unusually expensive equipment upgrades. Out with the cheap and old servers and in with something entirely new.
Obviously, this unexplained spending spree didn't fly at all with Wall Street.
No wonder, though. The average revenue per user is flat – and Meta’s shares are in freefall.