Meta Reportedly Shifts Spending from Metaverse to AI, Shares Rally on Cost-Cutting Signal

What happened

Meta Platforms' shares rose 3.4% after-hours, adding approximately $57 billion in market value, following reports that CEO Mark Zuckerberg plans to cut the budget for the loss-making Reality Labs division and reallocate resources toward artificial intelligence and smart glasses. Reality Labs has been a persistent drag on profitability, with annual operating losses around $17-18 billion as noted in recent SEC filings, contributing to the cautious 'WAIT' stance in the DeepValue report. Meta's core Family of Apps remains highly profitable, driving strong ad revenue growth and cash generation despite regulatory headwinds and competitive pressures. The company's AI investments are already critical for enhancing ad targeting and product features, but they have also led to heavy capital expenditures and organizational volatility. This strategic shift suggests a potential move toward more disciplined capital allocation, aiming to reduce near-term losses while focusing on AI-driven monetization, though execution risks and high AI spending persist.

Implication

Reducing spending on Reality Labs could directly improve Meta's near-term operating income by alleviating a multi-billion dollar annual drag, potentially boosting earnings per share. However, increased investments in AI and smart glasses may maintain high capital intensity, offsetting some financial gains if not efficiently managed. Strategically, this pivot leverages Meta's existing AI strengths in advertising but signals a retreat from long-term metaverse ambitions, which could impact future growth optionality. From a risk perspective, regulatory pressures on the core ad business and competition from platforms like TikTok remain unchanged, requiring continued innovation and compliance. Overall, while the shift addresses investor concerns over cash burn, it does not eliminate the broader execution and market risks highlighted in the DeepValue report, necessitating a balanced view.

Thesis delta

The DeepValue thesis cautioned on Meta due to heavy Reality Labs losses and uncertain ROI on long-duration bets; this news partially mitigates that by indicating a cut in metaverse spending, which could improve consolidated margins. However, the thesis remains dependent on AI investment efficiency, core ad resilience, and regulatory outcomes, so while the risk/reward profile improves slightly, a 'WAIT' stance is still warranted until official confirmation and tangible results are seen.