Guys. It's sasha facebook announced their q2 results last night after market closed and and the disaster that started two quarters ago has just got a lot worse. The is down five percent in pre market trading as i'm recording this video after already collapsing by 33 after the q4 results came out and another 23 after the q1 results. And i wanted to share my view on what's happening.

I will tell you my thoughts on why facebook share prices tanked and why i do not hold a position on facebook or have any intention on buying facebook stock facebook is one of the most popular stocks out there gets a huge amount of coverage right here on youtube out and across social media. But i just don't share the universal admiration for facebook. It just doesn't pass the sniff test for me. And i will tell you why but first let's look at what happened last night facebook announced their results and the headline figure is that facebook has seen a drop in revenue for the second quarter in.

A row they made. 288 billion dollars of revenue in q2 compared to 291. Billion dollars in the same quarter last year. But that is just the start because as you look further down the p.

L you will notice that the net income has collapsed from 104 billion down to 67. Billion dollars. There were a few reasonable explanations. Provided for why the revenue dipped you see the war in ukraine.

Means that facebook has faced bans and is seeing its use in russia and ukraine. Collapse and there is an overall pressure downwards on the ad. Spend across the industry. Although.

Google reported their results a day before facebook and their revenue. Did slow down. But was still 13 up year on year so facebook is getting hit a lot harder. But these excuses are not the reason that facebook's profit has dropped by 36 percent year on year.

Now the real reason facebook's net income is plummeting is because facebook's costs are exploding. They're completely going berserk. The general and admin costs have gone up from two billion dollars in q2 last year to three billion dollars in q2 this year. A 50 percent a huge mammoth 50 increase despite the revenue dropping in the same.

Period but even worse is this. R. D. Line.

Facebook managed to spend 87. Billion. Dollars. In r.

D. In the last quarter. And that is an absolutely astounding insane number. It is even more insane.

Because facebook is a software company. It is a software business. And the r. D.

Budget is 30 off their total overall revenue. For comparison purposes. Apple's revenue is about 250 percent higher and apple manufactures complex technology. Which requires a very large amount of r d.

Spent. But apple spends about 30 percent less on their r d. Than facebook. Tesla.

Another big popular stock spent less than 700 million dollars. In r. D. In the last quarter.

That's about 92 percent less than what facebook spent while only having 40 percent less revenue. Facebook also provides guidance for the third quarter and their guidance is 26 to 285 billion dollars worth of revenue. So according to facebook. They expect their revenue is likely to continue dropping again next quarter for the third quarter in a row.

One of the big talking points was mark zuckerberg. Deciding to try and beat tick tock by introducing reels into instagram on the earnings score. He said that real advertising revenue is running at an annualized rate of one billion dollars. Which kind of sounds alright.

But the problem for instagram is that these reels are apparently still less effective at earning revenue than instagram stories or the main feed and by some margin and this is just about summing up the really big problem with facebook. They seem to have stopped actually caring about their core business or actually. Modernizing and improving the facebook platform and instead decided to chase pie in the sky opportunities to try and simply copy what somebody else somewhere else is doing except not do it as well themselves facebook's core business is struggling revenue numbers are dropping and net income is collapsing through self. Destruction.

User growth has stored and monthly active users are sitting at 365. Billion. Users. The issue is that we're seeing the user numbers are basically reaching saturation this is already something like half of the entire world logging onto facebook or one of his other apps once a month and when you exclude young children and the elderly and people who are otherwise not going to be using the platform and countries.

Where the platform is banned outright is probably more like 70 or even higher. So everyone who might use facebook already uses facebook and over the last 10 years facebook has grown their advertising revenues per year about as much as the market will allow so. The user numbers have topped out and the ad revenue seems to have topped out as well so you can see why there is this element of panic. Within the facebook board trying to figure out where is the next bit of growth going to come from unfortunately that growth is not going to come from improving the existing products offering additional services.

Maybe some kind of freemium. None of that as facebook is trying to chase new opportunities. They've got one of the craziest spending sprees. I have ever seen their head count has grown by 32 in the last year to 83 and a half thousand staff and facebook is sinking insane amounts of money into a project called reality labs.

This is facebook's vr project where the thinking is that people will spend their life sitting on their dirty couch at home in the darkness. With a vr headset and live their lives inside. There. Instead of meeting.

Your friends and family in real life face to face. You know be able to touch and see each other properly maybe have a hug. It is of course a much better idea to meet in a virtual reality setting. Where you can be an avatar.

Talking to other avatars and the truth is there are probably some interesting use cases. But the unfortunate issue is that for the most part this golden goose chase is not solving any actual problems. The belief that people will spend their lives and spend a big chunk of their money in a vr environment. Probably came from a mix of watching too much matrix and the nft tulip bubble that we saw last year.

But this is genuinely what one of the biggest companies in the world is actually doing their. Reality labs. Business made 452 million dollars in. Q2 while costing the company.

33 billion dollars just to operate so they lost 28. Billion dollars on it in the last three months and as before you remember that they also spent another 87. Billion. Dollars in r.

D. A. Big chunk of which is research related to reality. Labs.

And here is what facebook's own outlook for reality labs is first they are saying that revenue is going to drop back down next quarter. And when they got a question right at the end of the earnings. Call. Asking.

What is the plan for reality labs like what kind of timeline. They're looking at what is their outlook. Facebook. Just said.

This is obviously an area that is on our priority list and so we do plan on continuing to invest in reality labs. We don't have a specific trajectory that we're giving guidance on and i am sorry. But if i was an investor in the business. This is just not good enough putting it extremely politely when you're spending several billion dollars on a hope and prayer project.

I would want a little bit more information as to what the it is that you're doing with all of that money and the problem for facebook is that spending money is becoming very. Addictive the capital expenditure has gone absolutely off the chart 77. Billion dollars in q2. This is bananas territory and on the earnings.

Call. Mark zuckerberg. Said. Our plan is to steadily reduce headcount growth over the next year.

Now note. The wording here it doesn't say what it kind of seems to say the plan is not to reduce head count. The plan is to reduce the growth of the headcount. So they are still going to be spending like crazy they're still going to be growing their head count growing their expenditure at a ridiculous rate.

It's just that the growth in spending will be a tad slower than it has been next quarter. And remember facebook is expecting revenues to drop in the next quarter in the quarter that i think facebook's main problem is that they are increasingly ignoring their core business and instead focusing on vanity projects that have next to zero actual proof of demand or even. A need in the first place and the best innovation that facebook talked about for much of the call last night is just trying to copy tick tock on instagram just not as well and remember tick tock. Didn't even exist five years ago.

And in five years time there will be another disruptor or maybe. 10. Stealing even more eyeballs and offering another cool new social platforms. That does things in a little bit different kind of way and usually the strategy of copying what disruptor is doing just not as well as a disrupter.

Some long period of time after the disrupter has already taken their market share is a losing strategy. I do understand innovation and the need for a business to push the boundaries. All the time go and explore new avenues. You always have to try and develop the next products of the future that don't exist today.

I get it. But not all innovation is the same not all innovation is necessarily good innovation for the sake of innovation. That solves no actual real problems or unproves and existing solutions can be a complete disaster. If you go too far down that road.

I know that there are some marginal use cases like playing vr games or maybe using vr for seeing places from the comfort of your home. Like doing initial house viewings. Without the need to travel or maybe get a feel for what another country looks like in a much better way than you would looking at a screen. But i hate to break it to the fanboys out there vr is not going to replace every facet of our lives people will not start buying homes in facebook's virtual reality world for tens or hundreds of thousands of dollars.

So that they can pretend to live in that home as an escape from their actual life well. I guess some people might do exactly that but this is not where mainstream human behavior is headed will any significant number of facebook's 36. Million monthly users go and throw their money at buying virtual reality outfits or nfts in the metaverse. Just ask yourself that question.

And think about it seriously even if there is a weird hype bubble at some point. Where people really start jumping on the bandwagon as with all other pointless high bubbles. It too will deflate once people come to their senses. I fundamentally do not see this implementation of vr as a meaningful improvement on how people work today at least not in its current guys maybe in several decades time with a very different technology.

I don't see vr as a meaningful replacement for how people communicate or interact with each. Other sure there will be some die hard fans out there who will really like the platform for a lot of people. The novelty will probably aware of relatively fast. And some adoption will occur.

It is a cool new tech after all there will be always some interest out there. But i just fundamentally do not see a seismic shift in human behavior. Coming from wearing a giant vr set for any meaningful proportion of the day and facebook is betting absolutely everything on this vr. They are spending an absurd amount of money on it and that absurd amount of money is growing at a ridiculous rate.

Every quarter and in the process. They are also increasingly neglecting their core business that got them to where they are in the first place. And this is why as a long term investor where i have an outlook. That is measured in more than say a month or the next quarter.

I have no interest in facebook stock. I said the same thing a few months ago when the share price was 50 higher than it is today and a few months before that when the share price was over 300. So unfortunately. This isn't just me bashing a company while it's down.

I just think the management's focus and the direction of the company at the moment are way too much of a risk for me to even consider making an investment if you found this video useful please don't forget to smash the like button for the youtube algorithm thank you so much for watching i really appreciate it and as always i'll see you guys later you.