What happened
Shares of Meta Platforms (META 1.22%) popped as much as 25.3% this week, according to data from S&P Global Market Intelligence. The social media giant and metaverse company announced major layoffs that investors took as a positive sign for profit margins over the next few years.
On top of this, technology and internet stocks rose broadly this week after inflation came in weak in October. As of 12:42 p.m. ET on Friday, Nov. 11, shares of Meta Platforms are up 23.3% this week.
So what
On Wednesday of this week, Meta founder and CEO Mark Zuckerberg notified 11,000 employees -- over 10% of its staff -- that they are getting laid off. Zuckerberg blamed himself for overhiring and extrapolating one-time gains for digital advertising and e-commerce during the pandemic that were not sustained during 2022. Because of this, the company needs to downsize its employee count in order to maintain profitability and give it the flexibility to work on its metaverse and virtual reality ambitions.
That said, 11,000 employees is a lot. Assuming total perks of $250,000 per employee (and this is before other expenses like travel, etc.), this should equate to billions in cost savings every year. On top of this, Zuckerberg says Meta Platforms will be reducing perks and overall budgets for remaining staff and downsizing its real estate footprint. All of these initiatives will save money for the business.
Investors have soured on Meta's stock recently because of its ballooning expenses for its social media applications, metaverse investments, and artificial intelligence (AI) research. With these cost cuts in place, profit margins should improve over the next few years, which investors took as a positive sign for shares of the stock.
NASDAQ: META
Key Data Points
Lastly, we shouldn't count out broad market movements this week. With weak inflation in October, Wall Street got extremely bullish this week, especially with technology stocks. The Nasdaq 100 Index, for reference, is up over 7%. This definitely had a positive impact on Meta's share price as well.
Now what
Even after this recent stock pop, shares of Meta Platforms are down 65% in the past year. At a market cap of $300 billion, the stock trades at a price-to-earnings ratio (P/E) of under 10 when looking at its 2021 net income, which was above $30 billion.
The problem is, Meta is investing a lot of these profits into risky endeavors like virtual reality goggles. This is great if you are a believer in the metaverse but should keep investors cautious about Meta's stock going forward, even with these cost-cutting measures.
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