Meta’s spending splurge starts to look troubling

Meta Platforms’ (META.O) present is indicating problems for the future. The social media company plans to invest nearly a tenth of its $370 billion market capitalization on various projects, including its concentrated bet on the metaverse. Last year, existing operations generated enough cash to justify the spending spree. If results slip – and the third quarter suggests they could – spending will become a problem.

The company said on Wednesday that revenue in the three months ending Sept. 30 fell 4% from a year earlier to about $28 billion, slightly higher than analyst expectations, according to Refinitiv. Profitability is worsening significantly, however. Mark Zuckerberg’s company posted operating income of $5.6 billion, almost half of what it was in the third quarter of 2021, as margins also declined considerably.

Part of the problem is that its core business of selling advertising on apps including Facebook and Instagram is getting stale. Daily active users inched up to almost 2 billion, just 3% higher year-on-year. Ambitions in the metaverse, which allows people to trot around a virtual world as avatars, will take time to produce results. Revenue from the division dubbed “Reality Labs” was a mere $285 million in the latest quarter, about 1% of the company’s total.

Meta expects capital expenditures to be between $32 billion and $33 billion for 2022. Data centers, servers and network infrastructure account for some of it, and a big slug also funds the metaverse initiative. Last year’s $59 billion in operating cash flow underpinned Zuckerberg’s bold initiative. In 2020, cash flow was only a bit higher than the current estimated range. Next year’s number is pegged as high as $39 billion.

The third-quarter top line was less than in the fourth quarter of 2020 while operating income dropped to the lowest level since the three-month period ending in June 2019, suggesting that spending projections may soon outrun cash produced from Meta’s daily businesses. Dialing back capex makes sense, but it would force Zuckerberg to recalibrate the timing, and perhaps the power, of the metaverse.

Source:Reuters

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