When Metaplatforms (FB -0.96%) updated investors with first-quarter fiscal 2022 results on Wednesday, April 27, it showed revenue growth slowing significantly. The company formerly known as Facebook has changed its name to signal its shift in focus to becoming a metaverse company.
The massive move from the social media giant to the metaverse company is already costly as it accelerates investment in equipment and personnel. But management is telling investors it will take its foot off the pedal to balance out the slowdown in sales.
Meta-platforms face considerable headwinds in 2022
In its recently completed quarter, which ended March 31, Meta’s sales were up just 7% year-over-year. This is the lowest growth rate of the last decade. The deceleration came amid tough comparisons to the year-ago quarter, when revenue jumped 47.6%. In addition, the policy changes in Apple (AAPL -0.25%) make it difficult to capture user information, which reduces Meta’s ability to sell targeted advertising.
As a result, Meta’s price per ad fell 8% in the March quarter. Decreasing advertising accuracy decreases return on investment. Unsurprisingly, marketers are unwilling to pay such a high price for advertising that offers lower returns. Consider that with targeting, most of your ads are shown to qualified customers, those who are most likely to buy your product or service. Less of your expense is wasted showing vegans advertising a steak restaurant.
As Meta works to adapt to Apple’s changes, management expects revenue of $29 billion midway through the second quarter. If it hits that target, it would mean revenue was flat compared to last year, when it also brought in $29 billion in the quarter ending June.
Calibrating expectations for the metaverse
With less money coming in, management is cautious and cutting expenses. He told investors on April 27 that he would cut spending in 2022 to $89.5 billion, down from the previous estimate of $92.5 billion, both halfway through.
Since rebranding to Meta Platforms, the company has reported results across two segments, Family of Apps and Reality Labs. The latter houses the company’s investments in augmented and virtual reality as well as associated hardware, software and content. The Reality Labs segment generated revenue of $695 million in the first quarter with an operating loss of $2.96 billion.
Meta’s 2021 results were better than management expected, which accelerated some of the investments in the transition to the metaverse. However, now that Meta is facing significant headwinds, it plans to cut spending on the switch.
Shareholders should be encouraged that management calibrates investments based on free cash flow. It is not on a defined path; he is ready to deviate. Nonetheless, the next few years will likely be volatile for the title as it pivots from social media, where it has proven absolute dominance, to the metaverse, where it has prospects unknown.