Meta’s ad sales growth—the slowest in a decade—may hamper its metaverse ambitions

The news: Meta posted earnings that were mixed, but not entirely disappointing—though its ad sales growth was the lowest it’s been since the company (then called Facebook) went public a decade ago.

• Analysts expected ad revenue of $28.3 billion for Q1 2022, up more than 8% vs. a disappointing final quarter of 2021. It came close but, at $27.91 billion, fell short.
• Wall Street expected Facebook to increase its daily active users (DAU) to 1.95 billion; it did slightly better, at 1.96 billion, representing 4% growth. Those users had dropped by two million last quarter, which sent shockwaves through the marketing world as it was the first such drop ever for the company.

Apple changes bite: Investors were looking for signs that Meta has made headway in limiting the impact that Apple's iOS ad-tracking modifications had on its advertising business last year. The answer: inconclusive.

• Apple published a curiously timed white paper the day prior by Kinshuk Jerath, a professor at Columbia Business School, who suggested it’s hard to specify any effect Apple’s privacy rules had on moving advertising income from platforms like Meta to Apple.
• Meta rival Snap released earnings last week that showed Apple’s privacy regime is still affecting its advertising revenue. Google parent Alphabet reported slower Q1 sales growth this week, particularly at YouTube.

Focus on Gen Z: With TikTok continuing to outperform Meta properties at winning over younger users, the Facebook and Instagram parent has been inspired to diversify its revenue streams—but those attempts, thus far, haven’t been all that inspiring.

• Meta’s expansion of its short-form video feature Reels is a minor tactical move rather than the kind of true innovation investors—and social media users, particularly younger ones—crave.

Another problem: Reels just isn't monetizing at the same rate as its Feed and Stories formats, but it is eating into time spent on those legacy formats. That’s likely because keeping ads to a minimum helps build an audience; more efficient monetization can and will come over time. Alphabet chief Sundar Pichai made that point on a Tuesday earnings call touting the growth of Shorts, YouTube’s TikTok competitor.

Analyst insight: DAU growth is a positive sign for Facebook “especially coming off of Q4 2021 when it experienced its first-ever decline in DAUs,” said analyst Evelyn Mitchell. “But it’s also clear that Facebook is still struggling to bring in new users, and it’s becoming increasingly difficult for Instagram to pick up the slack.” But Mitchell notes that a significant portion of that DAU growth came outside of North America, and those markets bring in less ad revenue per user than the US and Canada.

Reality check: The company’s Reality Labs unit, which is responsible for virtual reality (VR) and augmented reality (AR) hardware and software, brought in Q1 revenue of $695 million, up over 30% from the year prior. But it had losses of $2.96 billion—nearly 62% higher than its year-earlier quarterly loss.

• Without legacy advertising sales to fund its metaverse ambitions, the company will “slow the pace of some of our investments,” CEO Mark Zuckerberg said on the firm’s earnings call.
• Meta’s global headcount was 77,805 at the end of Q1, up 28% from a year earlier. Roughly 17,000 employees belong to the Reality Labs unit. That means about 22% of the company is responsible for about 2.5% of its revenue—an untenable ratio.
• Meta needs to focus on righting the ship in its core operations before further extending itself in business lines that may take years to provide substantial returns.