Meta Just Made a No-Brainer Move. Here's Why It Could Lead To More Profits.

There's no doubt that Meta Platforms (NASDAQ: META) CEO Mark Zuckerberg has been one of the most successful CEOs of the century, but his instincts aren't always correct.

Zuckerberg's focus on "connecting people" has at times left him blind to the downside of social media, and his fixation on the metaverse, which he described as an "embodied internet" in which you could one day teleport instantly as a hologram, has fallen flat.

His vision of the metaverse, which he declared at the tail end of the pandemic as the next big technological shift, was wrong. Instead, we now know that artificial intelligence, in particular generative AI, has claimed that mantle.

Not only was the metaverse push wrong as a product, but it's also been a boondoggle for the company, costing it tens of billions of dollars as it restructured as Meta. Meta's Reality Labs division, which includes the metaverse as well as devices like its VR headsets, smart glasses, and AI technologies, has lost $13.2 billion this year and brought in just $1.3 billion in revenue. In 2024, it lost $17.7 billion for the full year.

Image source: Getty Images.

Meta faces reality

Now, Meta seems to be changing its approach to the metaverse, with Zuckerberg finally realizing that its money could be better spent elsewhere.

According to a report from Bloomberg, Meta is planning to cut as much as 30% of the budget from the metaverse project, a move that lifted Meta stock by several points on Thursday. It's unclear how much money that would save the company, since it doesn't break out metaverse spending within Reality Labs, but it's likely in the billions of dollars annually.

The cuts will include its metaverse software Horizon Worlds product, as well as its Quest virtual reality unit. The move is expected to include layoffs, which could come as soon as January.

Not only will the cost cuts help Meta save money and drive profitability, but they will also redirect resources to more useful ends. It's also a sign that Zuckerberg is realizing that he can't dictate where technology is going, and that what is most important for new technology to be successful is that it's useful.

Gathering in virtual reality spaces online might have made sense during the pandemic when physical gatherings were verboten, but it's not a product that most people seem to need or want now, and spending billions of dollars on Zuckerberg's pet fantasy is a poor use of investor capital.

A little bit of déjà vu

It may be hard to remember now, but Meta stock tumbled in the wake of the Meta rebrand, in part due to a post-pandemic slowdown in digital advertising, but also due to a shift in priorities toward the metaverse, including the wide losses it revealed in Reality Labs.

In November 2022, Meta said it was laying off 11,000 employees, or 13% of its workforce, a move that helped kick off a recovery in the stock, as it said it would focus on profits, rather than just growth. Since bottoming out in 2022, the stock has jumped more than 500%, showing that strategy has clearly paid off.

With the metaverse cuts, Meta has another opportunity to commit to profitability and efficiency. It's unclear what changes will follow the 30% cuts, but this is clearly a change in direction for the company, and likely one that Zuckerberg was reluctant to take.

Meta has built a social media and digital advertising juggernaut, but it needs to ensure that the billions it spends on AI and other start-up projects have practical applications and can be monetized. By facing reality in the metaverse, the company is taking a major step down that path, and that's a win for investors.

Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.