Facebook’s shift to Metaverse expected to eat into profits

In its first quarterly earnings since changing its name in October, Meta will also break out its Reality Labs segment, which will offer investors insight into the health of the virtual and augmented reality consumer business unit that is at the heart of the metaverse efforts.

The name change was part of a bold strategic shift from Mr. Zuckerberg to bet the company’s future on VR headsets, AR glasses and virtual worlds, known as the metaverse, in which users can live and work.

Although this will be the first time Meta breaks out its Reality Labs segment, the company is expected to report relatively small revenue for the business unit. While Reality Labs represents the company’s vision moving forward, the Facebook and Instagram advertising business remain the core part of Meta’s revenue streams.

For the quarter, advertising is expected to represent nearly 98% of the company’s revenue, according to analysts surveyed by FactSet. Analysts predict Meta’s advertising revenue will rise to $32.6 billion in the fourth quarter of 2021, up 19.9% compared with the year-earlier period.

The company is expected to report a $10.9 billion profit for the fourth quarter, down more than 2% compared with a year prior, according to FactSet. This would be Meta’s first decline in net income growth since the second quarter of 2019.

The earnings are set to be released after markets close on Wednesday following a rough January for U.S. equities. It was the worst month for the tech-heavy Nasdaq Composite since March 2020 as investors consider how rising interest rates could weigh on the tech sector’s pricey valuations.

Shares of Meta fell more than 7% in January alone, extending a more than 16% slide since the company closed at a record high on Sept. 7 through its close on Tuesday.

“We got to be watching for things like how sensitive advertising businesses are to price increases and inflation,” said Daniel Newman, principal analyst at Futurum Research, which focuses on digital technology. “How robust is Facebook in an inflationary environment? Can they continue to raise prices even if the economy slows?”

If Google parent Alphabet Inc. is any indicator, Meta’s advertising business should be just fine. Alphabet on Tuesday reported its fourth-quarter earnings, with revenue up 32% year-over-year to $75.3 billion for the period.

As part of the breakout of the company’s VR and AR business, Meta will provide historical information for the segment, showing investors how the business has grown over the previous five quarters and the past three fiscal years. Of keen interest to investors will be how sales of the company’s Quest 2 VR headset fared during the 2021 holiday shopping season.

Upon announcing the name change in October, Mr. Zuckerberg said that the company expected “to invest many billions of dollars for years to come before the metaverse reaches scale.”

“Savvy investors know that new directions denote new spending—and since the metaverse isn’t well defined, I think they are expecting [Meta] to spend a ton of money,” said Kim Forrest, chief investment officer of investment firm Bokeh Capital. “But first movers are not guaranteed success—just ask Myspace.”

The strategic turn comes as the company continues to increase its user base. Last month, CNBC reported that Instagram had reached 2 billion monthly active users, a 100% increase since June 2018.

The latest earnings come as Meta continues to face criticism from lawmakers and users over revelations in The Wall Street Journal’s “Facebook Files” series, which showed that the company knows that its platforms are riddled with flaws that cause harm. Those articles spurred congressional hearings, prompted a rebuke from Facebook’s own oversight board and led the company to halt work on a version of its Instagram app focused on children.

The company has also endured a series of executive departures in recent months. Most notably, Chief Technology Officer Mike Schroepfer, head of Facebook’s cryptocurrency efforts David Marcus and the head of the company’s Messenger unit Stan Chudnovskyall announced their departures from the company in the last four months of 2021.