It was hard to ignore the red ink in Meta Platforms' (NASDAQ: META) latest earnings report.
Once again, the Facebook parent posted a huge loss in its Reality Labs segment at $2.8 billion for the three-month period. Slowing growth in its advertising business and the cash burn in the metaverse-focused division has forced the company to cut back on its hiring goals in order to control spending.
It's no secret by now that CEO Mark Zuckerberg is a big believer in the metaverse , which he describes as a kind of "embodied internet." Zuckerberg even changed the company's name from Facebook to reflect its focus on the metaverse, and he's hired thousands of engineers for Reality Labs, its division focused on virtual reality and augmented reality.
But it's worth questioning whether Meta's metaverse bet is misguided. The stock has plunged 60% in part because of skepticism over the company's shift away from its core social media business. The elevation of the metaverse also appears to be one reason why COO Sheryl Sandberg, who built the company's massive ad business, is leaving the company after 14 years.
The numbers in reality labs don't inspire confidence, either. Not only is the division burning more than $10 billion a year, but its top-line performance also doesn't seem to justify that kind of spending. In the second quarter, which the company reported last Wednesday, revenue increased 48% to $452 million, coming mostly from its Quest VR headsets. That means the company spent more than $3 billion in the quarter to bring in less than $500 million in sales. Even worse, it expects reality labs revenue to decline sequentially in the third quarter, a sign momentum in the category is fading.
Though Meta broke out reality labs revenue only this year, it's not a new business. The company acquired Oculus in 2014 for $2 billion, calling it the leading virtual reality technology company at the time. Though Oculus was still in the development stage without any hardware products for sale at the time, in 2016 it launched its first VR headset, the Rift, and several other devices have since followed. Today, Meta is now selling the second generation of the Quest VR headset, launched in October 2020, with the Quest Pro and Quest 3 expected to come out by next year.
Even with billions invested in the VR platform, though, there's one question that's still nagging at investors.
Where is the demand?
Reality Labs generated $2.3 billion in revenue, doubling from the year before. For a stand-alone company or a start-up, those numbers might be impressive, but for the amount of money that Meta is pouring into this experiment, it's worth asking if the potential demand is there to support more than $10 billion in annual cash burn.
Most of that spending is going to support future and nascent projects like Horizon Worlds -- its social VR app -- and headsets in development like Project Cambria and Quest 3.
Still, it remains unclear if VR headsets will ever gain mass adoption the way smartphones have, as practical challenges are evident. Unlike a smartphone, a VR headset gives you a portal to a virtual world, but it doesn't allow you to be in that world and the real one at once. You can't really walk anywhere with your headset on; you can't eat or drink easily. They're disruptive to the everyday activities we take for granted, meaning that the bar for adoption, at least outside of specific applications, is higher than it would be for a typical tech gadget.
There's also evident resistance among at least some portion of the population to increasing dependence on technology and further detaching oneself from physical reality.
It's unclear if Meta has even considered that overarching demand question, or how best to sell a futuristic product that represents a new technological dimension. Zuckerberg imagines the metaverse as the ultimate vision of the company's mission to connect people, saying about it on the recent earnings call, "most importantly, it enables deeper social experiences where you feel a realistic sense of presence with other people, no matter where they are." That statement may be true if you're comparing the metaverse to traditional social media, but as Calacanis argues above, there's no place that enables deeper social experiences than the physical world.
There's also some evidence that social media and tech like dating apps has already sapped real-world social connections. Teens are slower to get their driver's licenses today in part because they can connect with each through their phones; The New York Times declared in 2015 that house parties were on the decline in part due to technology like social media; even the remote work boom has come at the cost of social connections that used to happen at the office or at after-work gatherings.
Mass adoption of VR would only accelerate the transition away from real-world social connection, and it's unclear if people really want that. Zuckerberg himself believes that the metaverse will eventually supplant physical reality, telling podcaster Lex Fridman earlier this year that immersive digital worlds would "become the primary way that we live our lives and spend our time."
The easy answer
The convenient answer to the demand question and the one that VR technologists tend to give is that the technology isn't there yet. Once VR tech is good enough to do things like make work and communication easier or provide entertainment, it will gain adoption.
However, the practical challenges to VR going mainstream still look daunting. We'll learn more about its prospects over the next year or so as Meta launches the Quest Pro and Quest 3, which will provide some clarity into underlying demand for VR.
Until it becomes clear that there is broad consumer interest in a metaverse headset, reality labs deserves the investor scrutiny it's getting, especially while it's burning more than $10 billion a year.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman has positions in Meta Platforms, Inc. The Motley Fool has positions in and recommends Meta Platforms, Inc. The Motley Fool has a disclosure policy.
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