META: FUNDAMENTALS + NEXT TARGET

Unlike most major technology companies, Meta Platforms' stock has risen in response to its recent earnings report.

Facebook's parent company did not report particularly impressive results. Revenue fell 4% to $32.2 billion for the quarter, and earnings per share fell 52% to $1.76, though when adjusted for restructuring costs, earnings per share fell 18% to $3, which was better than expected.

Looking ahead to the first quarter, the company anticipates another modest drop in revenue, owing to macroeconomic headwinds in the advertising market and its decision to ramp up its Reels short-form video product, which is monetized at a lower rate than other "surfaces" such as news feeds and stories.

But there was something else noteworthy in the report and earnings call.

Mark Zuckerberg, CEO of Facebook, has shifted his focus to the company's core business, a family of apps that includes Facebook, Instagram, WhatsApp, and Messenger.

Under Zuckerberg's leadership, the company changed its name from Facebook to Meta Platforms just over a year ago, signaling that the metaverse would become a core business.

Around the same time, the company restructured its financial reporting structure, separating Reality Labs, which manufactures Oculus VR headsets and deals with the metaverse, from the app family segment. Reality Labs was exposed as a smoldering money pit as a result of the move, and things have only gotten worse since then. Reality Labs lost $4.3 billion in the fourth quarter, capping off a year in which it lost $13.7 billion.

As a seasoned politician, Zuckerberg appears to have learned that the best way to deal with bad news is to change the subject. In this case, he appears to be doing exactly that.

During the earnings call, the company discussed its investments in artificial intelligence (AI) and cost-cutting and efficiency initiatives, such as a more cost-effective data center architecture. According to the report, almost all of the company's capital expenditures, which are mostly for data centers, are for the app family, not Reality Labs.

In the earnings release, Zuckerberg also made no mention of Reality Labs, saying: "We're making good progress on our AI discovery engine, and Reels is a big part of that. Aside from that, our management theme for 2023 is 'The Year of Efficiency,' and we are working hard to become a stronger and more agile organization."

During the earnings call, Meta's CEO discussed the company's recent work in the metaverse, but it seemed to take a back seat to Meta's other projects when he summarized the company's priorities, saying: "Okay, here are the areas we're focusing on: AI, including our discovery engine, advertising, business messaging, and increasingly generative AI, as well as future metaverse platforms."

Meta's metaverse plans are far from dead. Indeed, it released Quest Pro, its newest headset, late last year.

There are several reasons why Zuckerberg appears to have returned to his core business. So far, the metaverse project has failed, not only at Meta, but also elsewhere. The value of the associated market of NFTs has plummeted, and the idea that people want to spend time in virtual worlds has yet to gain traction, while public interest in the metaverse appears to have faded after Zuckerberg initially hyped it. The metaverse's struggles are also visible in the recent attention paid to ChatGPT and generative artificial intelligence, which appear to be transformative technologies with real-world applications.

Perhaps Meta's CEO is reacting to the stock's precipitous drop. The stock dropped roughly 75% in a year after the company changed its name to Meta, with investors concerned that Zuckerberg would risk the entire company for his metaverse experiment.

He appears to have persuaded investors that this is not the case, which is why the company's stock has risen. While investing in Reality Labs, the company intends to steadily increase overall profits. It's a reasonable strategy that doesn't overshadow Meta's lucrative digital advertising business.

Although Metaverse will continue to smear red ink on reports, investors are now viewing the company through rose-colored glasses following Zuckerberg's encouraging speech. If the advertising industry can return to growth, as appears to be the case with Reels, the company's stock should continue to rise.

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