Meta Platforms' Reality Labs Division Recently Hit a Milestone, and It's Not a Good One

Yahoo

5 hours ago

Meta Platforms' losses on its Reality Labs division have continually risen over the years.
The company has invested aggressively into the metaverse without any clear payoff.
Now, the company is also spending heavily on artificial intelligence.
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Meta Platforms (NASDAQ: META) has diversified its business over the years. No longer is it just a social media company; it's expanded into artificial intelligence (AI) and of course, the metaverse, and it even changed its name to highlight its focus on that latter opportunity.
While Meta Platforms has piled a lot of resources into the metaverse and its Reality Labs division, the payoff simply hasn't been there, and it's questionable whether it ever will be. Recently, the Reality Labs division hit a milestone, which is more indicative of what kind of money pit it has become rather than terrific growth opportunity.
If you've been following Meta's performance in recent years, you've likely seen the continual losses from the Reality Labs business, normally totaling multiple billions of dollars per quarter. But with strong revenue growth from advertising and its social media platforms continuing, investors have largely ignored that unattractive part of its financials.
In its most recent quarter, however, the operating losses from Reality Labs reached a cumulative total of more than $60 billion. It's a staggering amount that the company has incurred on the business since first reporting on the new segment back in 2021.
Year
Operating Loss for Reality Labs
2025 (Q1 only)
$4.2 billion
2024
$17.7 billion
2023
$16.1 billion
2022
$13.7 billion
2021
$10.2 billion
Source: Company filings. Table by author.
That adds up to $62 billion. And what's noteworthy is that the losses have been increasing over the years.
Through the first three months of 2025, Meta grew its profits by 35% to $16.6 billion. Its Family of Apps segment, which includes its core social media assets such as WhatsApp and Facebook, generated an operating profit of nearly $21.8 billion, which easily covered the losses from Reality Labs.
While that has masked the issue thus far, there are a couple of reasons why this is worrisome.
The first and most obvious one is that eventually this advertising-fueled revenue growth will slow down. If economic conditions slow down, companies are likely to cut back on ad spend. As the growth rate slows and Meta's earnings don't look as impressive anymore, it'll only be a matter of time before more attention is paid to that troubling Reality Labs business. Investors may become more demanding of a payoff from that investment sooner rather than later, and that could lead to a sharp decline in the share price.
The second reason is that it highlights a deeper issue: poor asset allocation. Meta has been chasing the latest trends for years. It used to talk up the metaverse back when it was in the spotlight; it launched Threads to compete with Twitter (now X); and now its focus is on AI, recently announcing that it would roll out a stand-alone Meta AI app to compete against ChatGPT. The company has also invested $14.3 billion into Scale AI and has been looking at other AI companies to invest in as well. At a time when there are concerns about overspending on AI and with so many competitors out there, Meta looks like it may yet again become too aggressive in pursuing a hot tech trend.
Shares of Meta Platforms are up 19% this year (returns as of June 23) as investors continue to be bullish on its business. And at 27 times its trailing earnings, the stock may still appear to be modestly priced. But with the company investing heavily into the metaverse and now AI as well, tougher times may be ahead for the business, especially if the economy slows down. If its earnings start to fall, this could quickly become a much more expensive stock.
My biggest concern is with its aggressive spending, as that could backfire in the future. Right now, the market is at around all-time highs, and investor sentiment remains positive. But it may only be a matter of time before that changes due to tariffs and global trade issues. Meta's business is highly dependent on a strong ad market, and if that buckles, the social media stock could be due for a steep correction. Plus, there's still the antitrust case involving Instagram and WhatsApp looming over Meta, which could drastically change its business and its growth potential if a breakup ends up happening.
As well as the business has been doing in recent quarters, I'd stay on the sidelines and hold off on buying Meta's stock right now.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.
Meta Platforms' Reality Labs Division Recently Hit a Milestone, and It's Not a Good One was originally published by The Motley Fool