Meta warns investors of rise in Reality Labs operating losses

Company predicts its 2024 capex to be in range of $37bn and $40bn

Meta's logo at the company's headquarters in Menlo Park. AP

Facebook parent company Meta has cautioned investors that it expects operating losses for its Reality Labs division to “increase meaningfully” in 2024.

The predicted rise in losses is attributed to the company's continuing investments in product development and the expansion of its artificial intelligence ecosystem.

Reality Labs, which includes augmented and virtual reality-related consumer hardware, software and content for the Metaverse, reported an operating loss of more than $4.4 billion in the second quarter that ended on June 30.

It expanded from $3.7 billion operating loss in the prior year period.

But industry experts are not worried about surging losses in the division, focusing instead on its potential long-term benefits.

They believe Meta's existing overall profitability provides it with the flexibility to invest in risky ventures, such as those in the Reality Labs, without jeopardising its overall financial health.

“I think markets are noticing that Meta can afford a high-risk bet at this point, particularly given the company's fantastic margins,” Thomas Monteiro, senior analyst at Investing.com, told The National.

Rolf Illenberger, founder, and chief executive of AI firm VRdirect, said: “Reality Labs is and continues to be Mark Zuckerberg’s vision for the future.

"With share prices that have increased by five times over the past 24 months, he has successfully pivoted Meta in order to further placate that vision.”

Following the announcement, the company’s stock surged 7.28 per cent in after-market trading to $509.40 a share on Wednesday.

Earlier it closed 2.51 per cent higher at $474.83 giving the company a market cap of $1.20 trillion.

The company also predicted its full-year 2024 capital expenditures to be in the range of $37 billion and $40 billion, updated from its prior range of $35 billion and $40 billion.

Total expenses for 2024 are expected to be in the range of $96 billion and $99 billion, unchanged from Meta’s previous guidance.

“While we continue to refine our plans for next year, we currently expect significant capital expenditures growth in 2025 as we invest to support our AI research and product development efforts,” said Susan Li, Meta’s chief financial officer.

Earnings beat expectation

Meta reported a 73 per cent annual increase in second-quarter net income to almost $13.5 billion.

Revenue during the April-June period rose 22 per cent to more than $39 billion, beating analysts’ expectations of $38.3 billion.

It was the fourth consecutive quarter of more than 20 per cent annual growth. Earnings per share stood at $5.2 against the expectation of $4.7.

The California-based company said it expects third-quarter revenue to hover between $38.5 billion and $41 billion. Its mid-point of $39.75 billion is above analysts’ average estimate of $39.1 billion.

Meta is well-positioned to grow at a much faster pace compared to other tech companies in the coming months, industry analysts said.

“Meta is showing signs that it is able to keep growing at over 20 per cent per quarter level in a much more efficient way than other big tech peers, such as Alphabet and Microsoft, which are not only struggling to keep revenue growth in the double digits but also are progressively taking a bigger hit on the margins side,” Mr Monteiro said.

In the second quarter, advertising impressions across Meta’s family of apps and the average price for an advertisement soared by 10 per cent year on year.

Meta’s family of apps includes Facebook, Instagram, Messenger and WhatsApp.

“We are driving good growth across our apps … we had a strong quarter, and Meta AI is on track to be the most used AI assistant in the world by the end of the year," said Mark Zuckerberg, Meta founder and chief executive.

From April, Meta has stopped disclosing Facebook’s daily active users and monthly active users. It is now sharing a figure called “family daily active people”.

It stood at 3.27 billion in the last quarter, a yearly increase of almost 7 per cent.

The company's advertising revenue contributed nearly 98.1 per cent to overall sales in the second quarter, growing by about 21.6 per cent on an annual basis to more than $38.3 billion.

Revenue from other streams – including the Reality Labs unit – jumped 48.1 per cent on an annual basis to more than $742 million.