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Earnings Outlook: What’s worse for Meta: declining Facebook ad revenues or increasing costs of metaverse push?

Meta Platforms Inc. is facing some mega issues as it prepares to report fiscal third-quarter earnings on Wednesday afternoon.

There’s plenty to sweat over, but two things stand out: A drying-up digital-advertising landscape and a high-risk — some say foolhardy — bet on the metaverse.

Facebook parent company Meta
META,
-0.22%

has spent billions of dollars and upended operations to turn its Oculus acquisition into a vision of mixed-media technology — a vision developed through the obsessive tinkering of Meta co-founder and Chief Executive Mark Zuckerberg. Meta has pivoted to diversify its revenue model, in part to reduce its overreliance on advertising as inflation, foreign-exchange woes and a looming recession have caused the company’s first ever year-over-year revenue decline.

Snap Inc.’s
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+7.09%

dreary guidance on digital-ad revenue in the current quarter didn’t help matters last week.

How Meta will pull off such a tricky transition, however, has analysts and tech experts vexed. On Monday, major shareholder Altimeter Capital CEO Brad Gerstner lambasted the company’s metaverse strategy and called for a 20% reduction in payroll costs in an open letter, and Bank of America downgraded the stock in a note.

Read: Scathing Meta shareholder’s letter calls for layoffs, less spending on metaverse

“The metaverse is a concept. Zuckerberg is betting the future of the business on something that doesn’t really exist,” technologist and futurist Tiffany Pilgrim told MarketWatch. She believes the concept is 10 to 20 years away from broad-based appeal.

More than $1.5 billion has been spent on games and apps in Meta’s Quest store to date, with 33 titles each hauling in at least $10 million in gross revenue, according to the company. But those statistics and the introduction of a flagship metaverse hardware product, signaling the near-at-hand future of Meta’s plan, haven’t budged opinions.

“Facebook, now Meta, finds itself at a crossroads,” Bernstein analyst Mark Shmulik wrote following the debut of Quest Pro, Meta’s $1,500 virtual-reality headset for professionals, on Oct. 11. “The bears are loud, the bulls are at their wits’ end worried about holding on to a falling knife, while deep value investors remain on the sidelines wondering if and when to step in,” he wrote.

“No one uses Facebook anymore! The next Yahoo! Lighting money on fire for a metaverse dream that will never happen!” Shmulik added.

Read more: Facebook may be ‘lighting money on fire,’ but Meta stock is still this bull’s top pick

And it could get worse. “We cut our META ’22-’27 advertising estimates given 1) various macro and [foreign exchange] headwinds; 2) the transition to short-form video monetization; and 3) weaker than expected 3Q22 Digital ad” revenue,Cowen analyst John Blackledge cautioned in an Oct. 13 note that maintains an outperform rating and $205 price target.

What to expect

Earnings: Analysts surveyed by FactSet on average expect Meta to report third-quarter earnings of $1.90 a share, down from $3.22 a share a year ago.

Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are also projecting earnings of $1.90 a share on average.

Revenue: Analysts on average expect Meta to report $27.47 billion in third-quarter revenue, down from $29 billion a year ago. Estimize contributors also predict $27.47 billion on average.

Stock movement: As of Friday’s trading close, Meta’s stock has collapsed 61% so far this year — among the worst Nasdaq-100 
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+1.06%

 performers — while the S&P 500 index 
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+1.19%

has sunk 20%. Shares of Meta are down 23% since the company last announced quarterly results, in July.

What analysts are saying

Meta’s mega bet has investors worried amid Zuckerberg’s repeated warnings of a hiring freeze and massive restructuring. But some Wall Street analysts, including RBC Capital Markets’ Brad Erickson, see a silver lining of sorts.

In an Oct. 16 note, Ericksonsaid feedback he received from advertisers was more favorable toward Meta than Alphabet Inc.’s
GOOGL,
+1.37%

Google, the market leader. Meta got better reviews based on better return on ad spending and on cost per action, affordability and “idiosyncratic tailwinds” that favor social media over search technology for the holidays.

Still, the metaverse hangs like an ominous cloud on the horizon for the foreseeable future.

“If one or more metaverse platforms essentially becomes a closed ecosystem, consumers would not be able to travel freely between different metaverse ‘worlds.’ This could — with consumers locked into a closed system — lead to the emergence of gatekeepers that control access to a metaverse and its users, similar to the developments observed in a number of core platform services identified in the European Union’s recently agreed Digital Markets Act,” members of the European Commission said in a white paper on Oct. 17.

“The metaverse may well one day be a thing. Today, it’s not a thing. It may not be a thing for another five or 10 or more years (or ever). Timing matters,” Aviran Edery, senior vice president of marketplace atsoftware company Verve Group Inc., told MarketWatch. “Going all in on the name (even though it’s just optics) paints the strategy into a bit of a corner, i.e., ‘Metaverse or Bust.’”

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