Why Reality Labs will continue to spend billions even if Meta makes the biggest cuts in its history

For tech investors hoping that Meta Platforms will find religion on cost reductions when it comes to big VR spending, now is not the time to bet on it. The company is cutting costs, including mass layoffs, and much of the market has focused on the billions Mark Zuckerberg is pouring into Reality Labs and his vision for a future internet and social connections transformed by the concept of metaverse. Right now, that means more than $10 billion a year in Reality Labs losses, but a top Meta VR executive told CNBC this week the spending will continue.

Investors want to see Big Tech limit its spending in what has been a tough stock market and a slowing economy. Alphabet is under pressure to cut costs. Amazon is making layoffs, many of them in divisions of the company where risky bets haven’t paid off enough. Meta shares are down 65% in value this year, and an October letter from Altimeter Capital to its executives that said Mark Zuckerberg’s company has “drifted to the land of excess,” summed up the point. view of investors.

“Last week was really tough,” Ash Jhaveri, vice president of Reality Labs, said of the layoffs during an interview with CNBC’s Steve Kovach at the CNBC Technology Executive Council Summit in New York on Tuesday. . “But the investments we are making in core business and future business are the right ones,” he said.

He pointed out that the level of spend is a direct by-product of the level of change the company seeks.

“If you try to build a whole new computing platform with people in the middle of it, and invent a new technology that actually lets you feel like you’re in the same room with someone else, it is somehow [the] first run of what we’re doing…it’s an ambitious long-term vision,” said Jhaveri, who estimates he spends one to two hours a week in team meetings conducted through his virtual reality headset.

“It’s really about the next version of the internet, about what technology can do to connect us, to make us feel more present than what we can do today, and with an app or a site Web, you can only be so connected,” he said. . “That’s why we’re so invested in the space.”

The message from Meta VR’s top executive bolstered Zuckerberg’s position on the company’s latest earnings call. At the time, Reality Labs’ losses were $9.4 billion for the year, and the CEO said operating losses would increase significantly in 2023.

But some investors doubt Meta is sticking to that message. Zuckerberg said it would take up to a decade for the concept to become mainstream – although he expects spending to level off in the coming years.

“He has to say ‘we’re so committed to this…it may take ten years…it may be so many billions of dollars. But you get to a point where the rubber band snaps,'” Karen Firestone said. , CEO of Aureus. Asset Management, on CNBC’s “Fast Money Halftime Report.”

She pointed to Meta’s layoffs and recent loss of real estate after years of growth as evidence that Reality Labs could still face spending restrictions that the company won’t admit today.

“You see it over and over again with tech companies going on an expense, and then all of a sudden they get religion on the cost side,” Firestone said. “Nobody likes when your stock options are worth less and less.”

Jhaveri pushed back against the recent market narrative, which saw Meta as a declining business, citing more people on Facebook than ever before, and high profit levels still being generated from the core business. But Wall Street didn’t like the latest set of quarterly numbers, even though there were more active users. Revenues fell while Meta costs and expenses increased. Revenue was down about half from a year earlier and Meta’s operating margin fell. The stock recently rebounded from post-October earnings lows, alongside a rebound in the struggling tech sector.

“We need focus, and in many ways that doesn’t change our efforts, it just helps to focus them even more,” Jhaveri said of the market scrutiny.

Meta will face more competition from deep-pocketed rivals in a market where it has the early lead with Apple, which is expected to release its mixed reality headset soon.

One cost that Jhaveri said will come down is the $1,500 price tag on the Meta Quest Pro VR headset model, though that might not be soon either. Jhaveri said there’s good reason the current Pro model — which a CNBC reviewer called a “huge upgrade” but technology still in search of a suitable audience — is pricey.

“If you look at this pound for pound, atom for atom, it has the most technology in a headset…it’s almost like its own computer,” he said.

But he also drew a comparison to flat-panel TVs that once cost too much for most consumers. “For anyone who remembers when flat screens came out, 1999 or 2000, and it was $10,000 for a 40-inch plasma TV that wasn’t even 720, maybe even 480 [resolution]we were asking for it, and now it’s a 70-incher for $1,800,” Jhaveri said.

He said the cutting-edge technology in the Pro line is there for companies to adopt and help developers build on the platform, and a lot will eventually trickle down to mainstream models, the next being the Quest. 3 which is expected to launch next year.

“We strongly believe in lowering those cost curves, what’s cutting edge today will become mainstream tomorrow,” Jhaveri said.