In a recent article, Meta’s new CEO blamed the “metaverse” for the company’s layoffs, but the company’s hardware division has never been strong and its VR/AR division has been operating at a loss. Regardless, it’s a sad day for all of us who were looking forward to the new Portal smartwatch line.
Meta’s new CEO blames “metaverse” for its layoffs
Meta Platforms recently announced it was shutting down its smart display and smartwatch projects. The move is part of a massive cost-cutting effort that involved laying off 11,000 employees. The layoffs came after the company reorganized parts of its business, merging its voice and video calling unit with its messaging teams. The company also decided to focus on the enterprise market rather than the consumer market. A new division was formed focused on solving the company’s tough engineering challenges.
The company has also pulled the plug on two smartwatch projects, including its video-calling smart display. Executives said the company was no longer committed to selling Portal devices directly to consumers. In a townhall meeting with employees, Meta executives said they were refocusing their strategies and turning their attention to businesses instead.
The layoffs will affect all of Meta’s departments. The company is cutting about $1 billion in spending and laying off 11,000 employees, with the majority of its layoffs in its technology division. It is also cutting discretionary spending and extending its hiring freeze to 2023. It also plans to hire fewer people next year.
A smartwatch with dual cameras was slated to hit the market in spring 2023. The smartwatch, code-named Milan, was rumored to retail for $349, and it was expected to feature two cameras for video conversations. The company also announced plans to release a new consumer-grade VR headset next year. In its statement, Meta CEO Mark Zuckerberg said the new high-end VR headset would deliver “high-resolution mixed reality.”
Meta’s hardware division has never been strong
Meta has been putting a lot of money into developing its metaverse, but its hardware division has never been strong. The company has a history of pursuing a strategy of selling headsets at cost, and when the Rift was launched it retailed for nearly $8,000. Even so, you still had to purchase a gaming PC to use it, and the company faced stiff competition in the market at comparable prices.
As Meta is trying to regain market share, it may want to consider changing the antitrust laws to ensure fair competition. Some critics argue that current antitrust laws are too narrow and do not take into account the digital economy. In contrast, many of the services offered by Facebook are free. Meta’s move could have repercussions across Silicon Valley, and it could be a major turning point in the fight to break up Big Tech.
Despite the recent weakness, Meta is still a buy candidate. The company’s share price is still at an attractive P/E ratio. Moreover, the company has an ever-growing user base. This is good news for the company, which will enable it to focus its capital on areas with the highest growth potential.
Meta’s revenue guidance is based on an optimistic scenario, with the company still generating more than $44 billion in free cash flow. If its sales grow 10% per year, it could generate $35.2 billion in free cash flow in 2021. If that scenario pans out, Meta’s stock would trade at 17.2 times expected free cash flow in 2022. With this price tag, Meta’s stock is already a bargain compared to other tech companies in the market.
Meta’s future lies in AI, and its CFO has acknowledged that the company will continue to expand its AI capacity. It needs new servers and networking equipment to integrate AI into more infrastructure. It is also building new data centers to support next-generation hardware. This will provide the company with an edge over competitors.
Meanwhile, the company’s click-to-messaging business is also promising. It has a global user base, and it is the fastest-growing product of the company. As of Q3, it had US$1.5 billion in revenue and grew at 80% year-on-year pace. Given this huge user base, the opportunity is huge.
Although Meta controls 90 percent of the VR market, it is largely based in China. While it has a consumer partnership with Ray-Ban, it faces challenges in getting its headsets to work. Those problems can lead users to distrust the company, and people might be hesitant to hand over more personal data. The company’s privacy reputation is also a concern, especially after the Cambridge Analytica scandal.
In addition to the hardware challenges, Meta also has to deal with harassment. Its virtual avatars require expensive VR headsets, which can result in higher expenses. The company has spent more than $36 billion on R&D, and expects to spend $34-39 billion in capex next year.
Meta’s VR/AR division is operating at a loss
The layoffs at Meta come just days after Elon Musk’s Twitter laid off nearly half of its workforce in an effort to cut costs. However, according to Bloomberg, the company has rehired some of those employees. This indicates that the company’s initial decision to eliminate nearly half of its workforce was too short-sighted. Elon Musk has already begun legal action over Twitter’s decision. For thousands of people, finding a new job can be a challenge after a layoff.
The loss-making division is a big reason why Meta’s parent company is struggling financially. It has already made losses this year in two of its three most profitable quarters. Last quarter, the company lost $2.8 billion; this year, it has already lost $9 billion. The division’s profits are expected to be much lower in the coming quarters.
Meta’s revenues slipped by 4% during the third quarter. The company also reported higher total costs, with spending primarily on its Reality Labs division. Revenues were down to $1.4 billion, and the company blamed lower sales of its Quest VR headset for the fall. As a result, the company’s third-quarter operating margin plunged to 20% from 36% a year ago.
Although the company continues to invest in its VR/AR division, it isn’t doing so at a profitable pace. Last year, Meta’s VR/AR division lost more than $10 billion, including employee-related costs and R&D operating expenses. Moreover, the company reported losses on each Quest 2 VR headset sold. This has led employees to question the company’s direction. This could also impact future acquisitions.
Despite the massive investment in its VR/AR division, Meta has been losing money for the last several years. The company has spent nearly $36 billion on the division this year, but only generated $285 million in revenue. Accordingly, the company expects to continue operating losses until 2023.
Meta’s best hope for offsetting Reality Lab’s losses is to increase sales of its Quest 2 VR headset. As the holiday season approaches, the Quest 2 could see an uptick in sales. On the other hand, the company’s Quest Pro VR headset has had mixed results.
The company’s CEO has been defending its investments in the company’s VR/AR division. He pointed out that the macroeconomic environment was challenging and that his company’s investments are necessary for the company to remain competitive in the industry. However, Meta is facing a lawsuit filed by the United States Federal Trade Commission, claiming that it has monopolized the market. The FTC claims that the company’s recent moves inhibit competitive rivalry and innovation.
