As Reality Labs' Losses Keep Growing, Meta Platforms Should Take the Hint From Apple

Meta Platforms (META -0.07%) stock pulled back after its earnings report Wednesday night. The stock was trading down 3% after hours, even as the social media giant edged past estimates on the top and bottom lines. The Facebook parent had already soared this year, so expectations were high coming into the report.

Revenue rose 19% to $40.6 billion, which topped the consensus at $40.29 billion, and earnings per share jumped 37%, helped by a lower tax rate, to $6.03, beating expectations at $5.25.

However, with the stock price arguably getting stretched and growth in the advertising business slowing, investor attention turned to the company's spending in its Reality Labs division, and they didn't like what they saw.

Meta reported a $4.4 billion loss in that division, which is responsible for its hardware like its Quest VR headsets, AI infrastructure, and metaverse software. Reality Labs brought in just $270 million in revenue in the quarter, showing that the division is almost entirely a drain on the overall business with revenue that's essentially a rounding error for the overall business.

Time for a reality check

Meta announced in 2021 that the company was renaming itself from Facebook to Meta Platforms to reflect the growth of the business beyond its core social media platform and its focus on the metaverse, which at the time was gaining interest due to the stay-at-home effects of Covid.

CEO Mark Zuckerberg, who was the driver behind the rebrand and the focus on the metaverse, seems to have gotten the last laugh as Meta stock has soared since then, crossing the $1 trillion threshold. However, despite the proliferation of Meta's AI tools, the losses from Reality Labs are only growing, and the company expects them to continue to grow in 2025 as well.

Apple dials back the Vision Pro

Meta's growing money pit is notable because a key rival has essentially thrown in the towel on its own version of Reality Labs. Zuckerberg has called out Apple (AAPL -1.33%) as its primary rival in its attempt to own the next computing platform, as Zuckerberg said a couple of years ago.

For a while, it seemed like both companies thought that was the metaverse, but that vision seems nearly dead, given the weakness at Reality Labs and the ascendance of generative AI.

Apple seemed to accept that reality last week as The Information said that it drastically cut back on production of the Vision Pro mixed-reality headset due to poor customer response to the expensive device. It also reportedly told the device's assembler to stop working on the product in November, and Apple has notably been mum about the product since its launch in February.

The setback for the Vision Pro seems to be a warning sign for Meta's own metaverse ambitions, even though Meta's Quest devices are at a much lower price point than the Vision Pro.

Right time, wrong product

Zuckerberg was half right. We predicted a few years ago that the next major computing platform was around the corner. While that seems to be true, it's not the metaverse that Zuckerberg expected, but generative AI that has taken the world by storm, setting off tens of billions of dollars in investments in products like Nvidia chips.

Meta Platforms is working to be a leader in generative AI, but Zuckerberg's metaverse dreams seem all but dead. Scaling back on the metaverse, as Apple has done with the Vision Pro, would certainly save Meta Platforms money, though it's unclear how much.

Still, keeping Reality Labs as a separate segment may no longer make sense. While I wouldn't expect Meta Platforms to make the same move that Apple did, acknowledging the reality of the lack of demand for the metaverse would help Meta Platforms stock take its next leg up as investors are right to be skeptical of increased spending in the segment.