One of the most striking things about Facebook’s first few years as a public company was the cool efficiency shown in its earnings reports.
Quarter after quarter, year after year, revenue and net income went up and to the right at a steady clip. The company pivoted to mobile expertly, riding the wave of smartphone adoption and replacing desktop with mobile ad revenue at a controlled pace.
That history is partly what makes the renamed company’s third-quarter earnings report so startling.
Facebook (now called Meta) has had bad earnings reports before — in its second-quarter earnings report in July 2018, it warned about a deceleration in revenue growth and tighter margins. Investors knocked 24% off the stock in one day. Similarly gloomy predictions and missed expectations caused big one-day plunges earlier this year in February (Q4 2021) and July (Q2 2022).
But until this year, the company more or less kept spending under control. Revenue generally tracked to operating income growth.
For instance, in that troubling mid-2018 earnings report, annualized quarterly revenue growth of 42% translated into operating income growth of 33%.
For the full year of 2021, revenue growth of 37% translated into operating income growth of 43%.
Things began to change in the fourth quarter of that year, as 20% revenue growth from the year-ago quarter translated to a 1% decline in operating income. The trend has gotten worse with each progressive quarter, culminating in disastrous results for the latest period. Revenue fell 4%, a drop the company knew was coming and warned about last quarter. That translated to a shocking 46% decline in operating income.
Spending continues to balloon — it was up 19% from last year — even though Facebook knows revenue is declining.
The reason for this is an existential bet on the company’s future. CEO Mark Zuckerberg has said the company is willing to spend $10 billion a year to will the metaverse into existence, investing in virtual reality headsets that will take people there, and the Horizon Worlds virtual universe that they can explore once they arrive. They’ll also spur developers to create their own worlds.
Shareholders are starting to question that expenditure, with Altimeter Capital’s Brad Gerstner recommending the company slash its spend to $5 billion a year while also cutting headcount 20%.
There’s no reason to expect Zuckerberg to take his advice. The CEO has super-voting shares that make a hostile takeover impossible. He’s reportedly stacked the board with loyalists and urged out anybody who questioned him. And his longtime number-two, Sheryl Sandberg, who helped turn Facebook into an ad sales juggernaut and a wickedly efficient business machine, left earlier this year.
A decade ago, when Facebook was getting ready to go public, Zuckerberg wrote a letter to investors explaining his vision for the company. At the time, it was all about helping people form connections. The specifics have changed a bit over the years, at times incorporating private one-to-one communication through apps like Messenger and WhatsApp, and more recently morphing to immersive 3D interaction through the metaverse.
But the more important part of the letter is when Zuckerberg warned investors that Facebook was not here to make money. It was here to change the world, and making money was a means to help make that happen:
…Facebook was not originally founded to be a company. We’ve always cared primarily about our social mission, the services we’re building and the people who use them. This is a different approach for a public company to take, so I want to explain why I think it works.
I started off by writing the first version of Facebook myself because it was something I wanted to exist. Since then, most of the ideas and code that have gone into Facebook have come from the great people we’ve attracted to our team.
Most great people care primarily about building and being a part of great things, but they also want to make money. Through the process of building a team — and also building a developer community, advertising market and investor base — I’ve developed a deep appreciation for how building a strong company with a strong economic engine and strong growth can be the best way to align many people to solve important problems.
Simply put: we don’t build services to make money; we make money to build better services.
And we think this is a good way to build something. These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits.
By focusing on our mission and building great services, we believe we will create the most value for our shareholders and partners over the long term — and this in turn will enable us to keep attracting the best people and building more great services. We don’t wake up in the morning with the primary goal of making money, but we understand that the best way to achieve our mission is to build a strong and valuable company.
Facebook still generates gobs of money — its operating margin remains at a healthy 20%, it posted $4.4 billion in net income in the quarter, and net cash from operating activities came in at $9.6 billion. Those numbers are worse than they looked a year ago, but they’re more than enough to fund Zuckerberg’s next 10-year vision.
On the earnings call, he said, “I think those that are patient and invest with us are going to be rewarded.”
Investors who don’t agree with this vision should get out. Many already have — Facebook’s stock had lost about two-thirds of its value for the year before Wednesday’s earnings report. It’s down almost another 20% after hours.
WATCH: The advertising slowdown
Image and article originally from www.cnbc.com. Read the original article here.