1 reason why Meta’s Big Metaverse bet could crash

IIt was hard to ignore the red ink in Metaplatforms(NASDAQ: META) latest earnings report.

Once again, Facebook’s parent company posted a huge loss in its Reality Labs segment at $2.8 billion for the three-month period. Growth slowdown in its advertising business and cash burn in the Metaverse-focused division forced the company to cut hiring targets in order to control spending.

It’s no longer a secret now that CEO Mark Zuckerberg is a firm believer in the metaverse , which he describes as a kind of “internet embodied”. Zuckerberg even changed the company name from Facebook to reflect his focus on the metaverse, and he hired thousands of engineers for Reality Labs, his division focused on virtual reality and augmented reality.

But it’s worth wondering if Meta’s metaverse bet is wrong. The stock plunged 60% partly on skepticism that the company is moving away from its core social media business. The rise of the metaverse also appears to be one of the reasons COO Sheryl Sandberg, who built the company’s massive advertising business, is leaving the company after 14 years.

The numbers in reality labs don’t inspire confidence either. Not only does the division burn over $10 billion a year, but its overall performance doesn’t seem to justify that kind of spending either. In the second quarter, which the company reported last Wednesday, revenue rose 48% to $452 million, mostly from its Quest VR headsets. That means the company spent more than $3 billion in the quarter to achieve less than $500 million in sales. Worse still, he expects reality labs revenue to decline sequentially in the third quarter, a sign that the category’s momentum is fading.

Although Meta only generated revenue this year, it is not a new business. The company acquired Oculus in 2014 for $2 billion, calling it the leader in virtual reality technology at the time. Although Oculus was still in the development phase with no hardware products to sell at the time, in 2016 it launched its first VR headset, the Rift, and several other devices have since followed. Today, Meta is now selling the second generation of the Quest VR headset, which launched in October 2020, with the Quest Pro and Quest 3 due out next year.

Even with billions invested in the VR platform, there is one question that still plagues investors.

Where is the demand?

Reality Labs generated $2.3 billion in revenue, double the previous year. For a stand-alone business or start-up, those numbers might be impressive, but for the amount of money Meta is pouring into this experiment, it’s worth considering if the potential demand is there to support over 10 billion annual cash dollars. burn.

Most of that spending is going to support future and fledgling projects like Horizon Worlds — its social VR app — and in-development headsets like Project Cambria and Quest 3.

Yet it remains unclear whether VR headsets will ever gain mass adoption like smartphones have, as the practical challenges are obvious. Unlike a smartphone, a VR headset gives you a portal to a virtual world, but it doesn’t allow you to be in that world and the real world at the same time. You can’t really walk anywhere with your helmet on; you cannot eat or drink easily. They disrupt daily activities that we take for granted, which means the bar for adoption, at least outside of specific apps, is higher than it would be for a typical tech gadget.

There is also a clear resistance among at least part of the population to a growing reliance on technology and a greater detachment from physical reality.

It’s unclear whether Meta has even considered this all-important question of demand, or how best to sell a futuristic product that represents a new dimension in technology. Zuckerberg envisions the metaverse as the ultimate vision for the company’s mission to connect people, saying about it on the recent earnings call, “more importantly, it allows for deeper social experiences where you feel a realistic sense of presence with other people, no matter where they are.” This statement may be true if you compare the metaverse to traditional social media, but as Calacanis explained above, no place allows for deeper social experiences than the physical world.

There is also evidence that social media and technologies such as dating apps have already undermined social connections in the real world. Teenagers are slower to get their driver’s license today, in part because they can connect with everyone via their phone; The New York Times said in 2015 that house parties were on the decline, in part due to technology like social media; even the boom in remote work has come at the expense of the social connections that previously happened in the office or in after-work meetings.

The mass adoption of virtual reality would only accelerate the transition away from social connection in the real world, and it’s unclear if people really want it. Zuckerberg himself believes the metaverse will eventually supplant physical reality, telling podcaster Lex Fridman earlier this year that immersive digital worlds “will become the primary way we live our lives and spend our time.”

The easy answer

The practical answer to the demand question and the one that virtual reality technologists tend to give is that the technology is not there yet. Once VR technology is good enough to do things like facilitate work and communication or provide entertainment, it will be adopted.

However, the practical challenges of making VR mainstream still seem daunting. We’ll learn more about its prospects over the next year or so when Meta launches Quest Pro and Quest 3, which will provide insight into the underlying demand for VR.

Until it becomes clear that there is broad consumer interest in a Metaverse headset, Reality Labs deserves investor scrutiny, especially as they burn through more than $10 billion a year. .

10 stocks we like better than Meta Platforms, Inc.
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now… and Meta Platforms, Inc. was not one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of July 27, 2022

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Jeremy Bowman has positions in Meta Platforms, Inc. The Motley Fool has positions and recommends Meta Platforms, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.