Meta cuts to metaverse ‘black hole’ could free up billions for AI and lift shares by 20%: analysts

Meta poured staggering sums into its metaverse dream, betting that virtual worlds, avatars, and immersive headsets would define the next era of the internet. Instead, that vision has turned into what some analysts now call a spending “black hole”, swallowing tens of billions of dollars with little to show in profits. Reality Labs, the division behind Meta’s metaverse push, has racked up cumulative losses estimated in the tens of billions, even as investor patience has worn thin.

Now the tide is turning. Reports suggest Meta cuts to metaverse projects could reach as high as 30% of the budget, particularly within its Reality Labs division. These reductions could free up billions of dollars in cash flow, money that analysts believe will be redirected toward artificial intelligence (AI) infrastructure, AI models, and AI-powered products that directly support Meta’s core advertising business.

Wall Street is paying attention. As CEO Mark Zuckerberg pivots from the metaverse to AI superintelligence, some analysts say this shift in capital allocation could boost earnings and potentially lift Meta stock by 15% to 20% over time, especially if AI investments translate into stronger ad targeting, better user engagement, and new revenue streams.

In this in-depth article, we will explore why Reality Labs became a financial drag, how metaverse budget cuts could unlock billions for AI investment, and why analysts think this pivot could power a fresh leg higher in Meta’s share price. We will also examine the risks, including regulatory scrutiny, intense AI competition, and the possibility that Meta may be walking away from a long-term metaverse opportunity just as rivals quietly build.

Meta’s Metaverse Bet: From Vision to “Black Hole”

How Reality Labs Turned into a Cost Sink

When Meta rebranded from Facebook in 2021, the message was clear: the metaverse would be the company’s next great frontier. Billions flowed into Reality Labs to develop VR headsets, AR glasses, and immersive platforms like Horizon Worlds. Yet the financial results have been stark. Reality Labs has posted multi-billion-dollar annual operating losses, with cumulative losses since 2019 estimated at more than $60–70 billion, while generating only a fraction of that in revenue.

Analyst Jack Yuan of Mizuho famously described Reality Labs as a “black hole” of spending, highlighting a recent quarter in which the division lost over $4 billion on less than half a billion in revenue. That kind of negative operating leverage has made Reality Labs the prime target for cost cuts as Meta rethinks its priorities.

Why the Metaverse Thesis Stumbled

Several factors have contributed to the metaverse slowdown. Consumer adoption of VR and AR hardware has lagged expectations, with headset sales and usage lower than the exuberant forecasts of 2021. Even as Meta subsidized devices like the Quest line, recurring software and services revenue struggled to catch up. Meanwhile, competition from gaming consoles, mobile entertainment, and social platforms diluted the appeal of spending long stretches of time in virtual spaces.

At the same time, investors began to question whether massive metaverse spending was justified when Meta’s core advertising business remained enormously profitable and ripe for AI-driven optimization. As interest rates rose and capital became more expensive, Wall Street pushed for discipline, urging Meta to rein in experimental spending and refocus on high-return projects.

What the New Meta Cuts to Metaverse Actually Look Like

Up to 30% Budget Reductions at Reality Labs

Recent reports suggest Meta is planning to cut up to 30% of the metaverse budget, targeting Reality Labs’ hardware and platform initiatives. These cuts are being discussed as part of Meta’s budget for 2026 and could involve both project-level reductions and staff layoffs, particularly across VR and Horizon Worlds teams.

For context, previous rounds of metaverse cost-cutting were estimated to save around $3 billion annually, and analysts now believe deeper cuts could bring total savings into the $4–6 billion range over the next few years. That kind of reduction fundamentally changes the company’s cash flow profile and gives management more flexibility to invest in areas with clearer paths to profitability.

Trimming Ambitions, Not Killing the Metaverse

Importantly, Meta is not shutting down Reality Labs entirely. Instead, it appears to be reshaping the unit, focusing on projects with strong strategic overlap with AI and wearables, such as smart glasses and AI assistants embedded in hardware. Higher-risk, long-horizon metaverse experiments are more likely to face cuts, while devices that integrate AI features and have near-term commercial potential get more protection. This means Meta is effectively putting its metaverse ambitions “on a budget.” The company can continue to ship new XR devices and software updates, but under stricter financial guidelines and with a clear expectation that the division must move toward smaller losses over time instead of permanent deep-red results.

How Cuts Free Billions for AI Investment

Redirecting Capital Toward AI Superintelligence

As money flows out of the metaverse “black hole,” it is being redirected into AI supercomputing, data centers, and advanced AI models. Meta has already announced plans to spend tens or even hundreds of billions of dollars over time on AI infrastructure, including massive data centers and GPU clusters designed to power its Llama models and long-term superintelligence ambitions.

The economics are compelling. Unlike metaverse projects that often depend on uncertain future adoption, AI investments can immediately support Meta’s core products: Facebook, Instagram, WhatsApp, and its ad network. Better AI recommendation systems, more accurate ad ranking, and AI-driven content tools directly support revenue and margins.

Funding AI by Cutting Low-Return Projects

Analysts see a clear pattern: Meta is tightening spending in lower-return areas to fund AI expansion without letting total capital expenditure spiral out of control. This includes not only metaverse cuts, but also reductions in staff stock compensation and layoffs in teams that are less aligned with AI priorities.

By reallocating billions from Reality Labs to AI, Meta can continue building out its AI infrastructure and research while still meeting Wall Street’s demands for efficiency. The message to investors is that Meta has learned from its metaverse spending spree and is now applying a more disciplined capital allocation framework, centered around AI-driven growth.

Why Analysts Think Shares Could Rise 20%

Earnings Leverage from Lower Metaverse Losses

One of the biggest reasons analysts believe Meta’s stock could climb another 15–20% lies in the impact on earnings. Reality Labs’ enormous operating losses have been a heavy drag on Meta’s consolidated profitability. Cutting billions from that division has an almost one-to-one positive effect on operating income, particularly if the savings are not fully offset by new costs elsewhere.

Mizuho analysts, for example, have suggested that metaverse spending cuts could add around $2 per share to Meta’s 2026 earnings, by reducing the losses attributed to Reality Labs. Bank of America and other firms have also argued that tighter metaverse budgets could unlock billions in savings and support higher earnings estimates, which, when multiplied by Meta’s valuation multiple, translate into meaningful upside for the stock.

AI as a Growth and Valuation Engine

On the other side of the equation, the funds redirected to AI could act as a growth catalyst. AI-powered improvements to ad targeting, ranking, and user experiences have already boosted Meta’s monetization and engagement metrics. As AI tools become more sophisticated, Meta can roll out AI assistants, generative content tools for advertisers, and new business services that extend beyond pure advertising.

If investors come to view Meta as not just a social media giant but a leader in open-source AI, AI infrastructure, and consumer AI experiences, the market may assign a richer valuation multiple. A combination of higher earnings plus even a modest re-rating on the multiple could make a 20% share price gain plausible in the eyes of bullish analysts.

Strategic Upside: Why AI Fits Meta Better than a Maximalist Metaverse

AI Supercharges Meta’s Core Strengths

Meta’s biggest structural advantage is its enormous base of users and advertisers. Artificial intelligence is uniquely suited to extracting more value from that ecosystem. Recommendation algorithms decide what content people see, how ads are targeted, and which posts go viral. By investing heavily in AI models that understand language, images, and video, Meta can make its feeds more engaging and its ads more effective.

In contrast, the metaverse required asking users to adopt new behaviors, buy new hardware, and shift their time away from mobile apps that already work well. This made it inherently riskier and slower to monetize. By reallocating capital toward AI, Meta is leaning into areas where its existing data, network effects, and platform reach give it a clear edge.

AI Enhances Both Consumer and Business Products

AI is not only about back-end systems. Meta is embedding AI assistants, chatbots, and content-generation tools directly into its apps. Advertisers can use generative AI to create ad copy, images, and video variations, while creators may use AI to edit content, remix trends, or reach new audiences. These use cases tie directly into Meta’s revenue model, making AI a natural engine for both top-line growth and margin expansion. Compared with speculative metaverse revenue, the path from AI features to financial impact is shorter, clearer, and easier for investors to model.

The Risks: What Could Go Wrong with the Pivot?

AI Arms Race and Capital Intensity

While AI fits Meta strategically, it also comes with serious challenges. Building leading-edge AI models and the infrastructure to support them is incredibly expensive. Meta is competing against Nvidia-powered clouds, hyperscalers like Amazon, Microsoft, and Google, and specialized AI companies. A misstep in model quality, reliability, or monetization could make even AI investments look inefficient in hindsight. This means Meta must execute flawlessly: design competitive models, scale infrastructure efficiently, and turn AI features into sustainable revenue rather than just a trendy talking point.

Regulatory Pressure and Privacy Concerns

As Meta leans harder into AI, it faces intensified scrutiny from regulators, particularly around data usage, user privacy, and content moderation. Some regions have already slowed or paused the rollout of certain Meta AI features due to regulatory concerns, underscoring the risk that AI monetization could be constrained by legal and political factors.

If regulators impose tough rules on training data, personalization, or algorithmic transparency, Meta may find it harder to extract full value from its AI investments, blunting some of the upside analysts are predicting.

The Opportunity Cost of Shrinking the Metaverse

There is also the question of long-term opportunity cost. By cutting deeply into its metaverse budget, Meta risks ceding ground to competitors who pursue mixed reality and spatial computing more steadily. If AR and VR finally inflect later in the decade, Meta could find itself less dominant than it once hoped.

This does not negate the logic of cutting today, but it highlights the delicate balance: Meta must preserve enough XR innovation to stay relevant, even as it reins in the division’s losses and focuses on AI.

What Meta’s Shift Means for the Future of the Metaverse

A Slower, More Disciplined Metaverse Roadmap

The new reality is a metaverse on a budget. Instead of trying to build an entire virtual universe at once, Meta appears likely to prioritize targeted products that connect directly with AI and real-world use cases, such as AI-powered smart glasses or productivity tools that blend physical and digital spaces.

This could ultimately lead to a healthier ecosystem. With less pressure to justify enormous sunk costs, Meta can be more pragmatic, focusing on features and devices that users actually adopt rather than chasing grand but vague visions.

AI and Metaverse: Convergence Rather Than Replacement

In the long run, AI and the metaverse are not mutually exclusive. AI avatars, intelligent NPCs, real-time translation, and generative 3D environments all depend on sophisticated AI models. By strengthening its AI capabilities now, Meta may actually be laying the foundations for richer immersive experiences later, if and when the hardware and consumer demand finally align.

For now, however, the market is rewarding Meta for doing what investors have asked for since the stock’s painful drawdown in 2022: cut back on the metaverse “black hole,” focus on AI productivity, and restore financial discipline.

What Investors Should Watch Next

Evidence of Real AI Monetization

Investors should keep an eye on how quickly Meta converts its AI initiatives into measurable revenue and profit improvements. Key signals include better ad performance metrics, higher average revenue per user (ARPU), and new AI-driven products for businesses and creators.

If Meta can point to clear, recurring revenue from AI tools and demonstrate that AI features reduce churn or boost time spent on its apps, the case for a higher valuation becomes stronger.

Trajectory of Reality Labs Losses

Another key metric is the trajectory of Reality Labs. Investors will want to see losses narrowing over time, reflecting the impact of the Meta cuts to metaverse spending. If the division’s operating losses shrink consistently while AI-related metrics improve, that will validate the thesis that Meta is reallocating capital more intelligently.

Guidance and Analyst Revisions

Finally, watch how Meta’s guidance evolves and how analysts adjust their models. Upward revisions to earnings estimates, especially if explicitly tied to metaverse cost reductions and AI-driven growth, would support the idea that the stock could climb another 15–20% from current levels.

Conclusion

Meta’s decision to dramatically trim its metaverse spending represents a pivotal moment in the company’s evolution. The metaverse, once the centerpiece of its future vision, has become a financial “black hole”, draining tens of billions of dollars with modest commercial traction. By making significant Meta cuts to metaverse initiatives and Reality Labs, the company is effectively closing that black hole and freeing up billions in capital that can be redirected toward AI infrastructure, AI models, and AI-powered products closely aligned with its profitable advertising machine.

Analysts increasingly argue that this shift could add meaningful dollars to Meta’s earnings per share and support a potential 20% rise in the stock, especially if AI investments translate into stronger monetization and durable competitive advantages. At the same time, the pivot is not without risk. The AI race is brutally competitive, regulators are watching, and the metaverse could still emerge as a major platform later in the decade.

For now, though, the market is sending a clear message: disciplined spending, efficient capital allocation, and a focus on AI-driven value are what investors want from Meta. If the company can sustain that discipline while keeping a scaled-back but strategic presence in XR, it may manage to unlock the best of both worlds—harvesting AI gains today while preserving optionality in the immersive future it once championed.

FAQs

Q: How much money could Meta realistically save by cutting its metaverse “black hole” next few years?

Meta could potentially save several billions of dollars annually by trimming the budget for its Reality Labs division, which has been responsible for some of the largest operating losses in the company’s history. Analysts have previously estimated that earlier rounds of cost reductions at the metaverse unit might save around $3 billion a year, and newer reports suggesting cuts of up to 30% to the metaverse budget point to even larger savings in the mid-single-digit billions over time. These savings matter because they flow straight through to operating income if they are not entirely offset by new expenses elsewhere, effectively raising Meta’s earnings power. When investors apply a valuation multiple to higher earnings, even a modest improvement can translate into a sizable increase in market capitalization and potentially support a double-digit percentage gain in the share price.

Q: Why do some analysts believe that shifting funds 20 percent rather than simply stabilizing it after years of volatility?

The reason analysts see upside rather than mere stability is that the pivot from metaverse spending to AI investment can improve both sides of the valuation equation at once. First, cutting losses in Reality Labs boosts Meta’s reported earnings by removing a persistent drag on profitability, which makes standard valuation metrics like price-to-earnings more attractive. Second, reallocating that capital toward AI projects with clearer ties to revenue growth, such as better ad targeting and new AI-driven tools for users and advertisers, can raise expectations for future growth. When higher earnings collide with stronger growth expectations, investors may be willing to assign a higher earnings multiple to Meta’s stock. The resulting combination of better fundamentals and an improved narrative around AI leadership is what leads some observers to argue that the shares could climb by 15 to 20 percent if management executes well on this strategic pivot.

Q: How does Meta’s shift away from aggressive metaverse reality and immersive computing compared with other big tech companies?

Meta’s decision to cut back sharply on metaverse spending does not mean it is abandoning extended reality, but it does signal a move to a slower, more financially constrained innovation path in that space. In practical terms, the company is likely to prioritize XR projects that complement its AI strategy, such as AI-enabled smart glasses, rather than maintaining a sprawling array of costly metaverse experiments. This creates an opening for rivals like Apple, Microsoft, and specialized XR companies to build momentum with more focused, premium devices and enterprise solutions. At the same time, Meta’s reduced burn rate could help it stay in the XR race for longer, because lower losses make it easier for management to keep investing even if adoption remains gradual. Over the long term, Meta’s competitive position in immersive computing will depend on whether it can leverage its AI strengths to create compelling XR experiences, or whether the decision to cut spending now leads to a loss of technological and ecosystem leadership when the market finally matures.

Q: In what ways can AI investments directly investors see this as a more rational use of capital than continued metaverse expansion?

AI investments can enhance Meta’s core advertising business in multiple concrete ways that investors can easily understand and model. Advanced AI recommendation systems can improve the relevance of content in users’ feeds, keeping people engaged longer and creating more opportunities to show ads. Sophisticated machine learning models can refine ad targeting, making it more likely that the right user sees the right ad at the right moment, which tends to increase click-through rates and conversion rates. Meta can also offer AI tools to advertisers that automatically generate and optimize creative assets, reducing friction and encouraging more spending on its platforms. Because these improvements map directly onto key metrics such as CPM, ROAS, and revenue per user, investors perceive AI spending as a more rational use of capital than pouring money into metaverse projects whose monetization timelines and adoption curves are much more uncertain. AI allows Meta to monetize its existing user base more efficiently, rather than asking users to migrate into a new environment that may or may not reach mass scale.

Q: What key indicators should individual investors strategy of cutting metaverse costs and AI is actually working as analysts expect?

Individual investors who want to track the success of Meta’s strategy should pay close attention to a few specific indicators in future earnings reports and conference calls. First, they should watch the operating loss line for Reality Labs, looking for clear evidence that losses are narrowing as the Meta cuts to metaverse spending take hold and that management remains committed to keeping the division on a tighter budget. Second, they should examine comments and metrics related to AI, such as updates on AI infrastructure investments, the performance of AI-enhanced ad tools, and any disclosed revenue or user engagement gains directly tied to AI features. Third, investors should listen for changes in guidance and see whether analysts respond by raising earnings estimates or price targets, particularly if they explicitly credit metaverse savings and AI-driven improvements. If Reality Labs losses decline steadily while AI contributions to the core business become more visible and guidance trends upward, that will be a strong sign that Meta’s strategic pivot is delivering the kind of financial and competitive benefits that many analysts are currently forecasting.