Is Mark Zuckerberg’s metaverse vision burdening Meta shares?

Facebook’s parent Meta continued to invest billions in building its metaverse in the three months to the end of September, while its core business continues to struggle. Beyond the argument that no one knows what the metaverse actually is, investors and analysts have raised questions about the company’s plans.

- Investment firm Altimeter Capital calls for $5bn cap on metaverse investments

- Zuckerberg expects Reality Labs expenses to “increase meaningfully” in 2023

- None of the main thematic ETFs are weighted heavily in favour of Meta

Mark Zuckberg isn’t backing down from his vision of Meta [META] building the metaverse. But at what cost is this coming to the Facebook parent company’s business?

In its most recent set of financial results, released on 26 October, total revenue was down 4% to $27.7bn. The social media company also revealed that its Reality Labs unit, which oversees the development of augmented reality (AR) and virtual reality (VR) products and services, had seen a 49% year-over-year drop in revenue to $285m in Q3 2022. This was attributed to lower sales of its Quest 2 headsets.

Even more concerning was the fact Reality Labs posted a wider loss of $3.7bn versus a $2.8bn loss in the previous quarter. This dragged overall net income to a profit of $4.4bn, down 52% from the year-ago quarter. Total expenses were up 19% year-over-year to $22.1bn, with Reality Labs contributing $4bn, up 24% year-over-year due to increased employee-related costs and technology development.

Investors have clearly been spooked. The Meta share price has cratered 35.28% in the past month, setting a 52-week low of $88.09 on 4 November. The stock has been under pressure all year and is down 73.01% so far in 2022.

The need for a metaverse cap

Despite the valuation plunge, Zuckerberg doubled down on the Q3 2022 earnings call. “The internal indications I’ve seen suggest we're doing leading work and we’re on the right track with these investments, so I think we should keep investing heavily in these areas,” said Zuckerberg.

“I think people are going to look back on decades from now and talk about the importance of the work that was done here,” he added.

His optimism isn’t well-shared and his unwavering commitment to the metaverse has also irked some of the bigger shareholders. These include the investment firm Altimeter Capital, which reportedly owns 2.5 million shares, giving it a 0.11% stake, according to Bloomberg.

The firm’s founder, Brad Gerstner, published an open letter to Zuckerberg and his leadership team following the Q3 2022 earnings in which he called for a cap on metaverse investments of $5bn per year.

Investors would happily support the company if it were to scale up investments “with more discrete targets and measures of success, as opposed to todays’ much more ambitious and open-ended strategy,” wrote Gerstner. 

Pace of investing raises questions

Nevertheless, there’ll be no let up in investment for the foreseeable future. Meta expects expenses in its Realty Labs unit to “increase meaningfully again in 2023”. The question is when this high level of investment might pay off.

“In our view, if [AR and VR] were to become the next mobile and at-home computing platforms, the return on investment could dwarf the $10–15bn per year that

Meta currently is spending to secure leadership in the space,” wrote Nick Grous, associate portfolio manager at ARK Invest, following the Q3 2022 earnings.

“That said, if AR and VR do not scale to the mass-market, Meta’s current pace of investing could be a colossal mistake.”

Meta is not the only big player that believes in the metaverse, of course. Roblox [RBLX] is championing it with its immersive games, while Disney [DIS] has argued that it holds the key to “next-generation storytelling”. Apple [AAPL] CEO Tim Cook said on the Q1 2022 earnings call that it sees “a lot of potential in this space”.

Still, despite the buzz, the metaverse won’t be built overnight and so it needs to be seen very much as a long-term investment trend.

ETFs not weighted in favour of Meta

Meta may be the metaverse leader, but fund managers are clearly sceptical about the company in the near-term. None of the main thematic ETFs have allocated much of their portfolio to the stock.

Meta is the fifth-biggest holding in the Roundhill Ball Metaverse ETF [METV], with a weighting of 5.04%, The fund is down 10.94% in the past month and 53.36% year-to-date.

The company is the eighth-biggest holding in the Fount Metaverse ETF [MTVR], with a weighting of just 2.42% as of 4 November. The fund is down 7.01% in the past month and 42.09% year-to-date.

It’s only the thirteenth-biggest holding in the Global X Metaverse ETF [VR], with a weighting of 3.62%. The fund is down 27.31% since it listed on 28 April and down 9.92% in the past month.