Coming into Meta Platforms' (META 2.33%) fourth-quarter earnings report on Wednesday, investors had low expectations.
The stock had plunged following its third-quarter earnings report after the company said its losses in Reality Labs could balloon to $15 billion to $20 billion in 2023. It also reported its second-ever decline in revenue due to slowing ad demand, competition from TikTok, Apple's targeting restrictions, and a stronger U.S. dollar.
On the surface, fourth-quarter results weren't much better. Revenue fell 4% to $32.2 billion, reflecting declines in both its family of apps and Reality Labs segments, but that still beat the analyst consensus at $31.5 billion.
On the bottom line, earnings per share plunged by 52% to $1.76, which was below the analyst consensus of $2.22. However, that figure includes $4.2 billion in restructuring charges taken in the quarter for severance and related costs and the closure of some of its offices and data centers. The severance costs reflect the company's earlier decision to lay off 11,000 employees.
Adjusting for those one-time expenses, the company said that the operating margin in the fourth quarter would have been 33% instead of 20%, and earnings per share would have come in at $3.00, down just 18% from the quarter a year ago, and well ahead of analyst estimates.
The company's guidance also reflected a renewed focus on cost control. Management dialed down its expense guidance for 2023 from $94 billion to $100 billion to $89 billion to $95 billion, which translates to a cost increase of just 5% from 2022 at the midpoint. Management also trimmed its capital expenditures guidance for the year, saying it would spend just $30 billion to $33 billion, down $4 billion from its previous range as it's shifted to a more cost-efficient data center architecture.
Separately, the company announced a $40 billion share repurchase authorization, a sign that it thinks the stock is cheap.
Investors cheered the news, sending the stock jumping 20% after hours on Wednesday.
Image source: Meta Platforms.
Is Meta finally turning the corner?
Meta investors who held through its peak in 2021 and bottom last year saw their shares fall more than 75%, wiping out over $700 billion in market value.
The company was hit by challenges on multiple fronts, and it chose at the same time to aggressively ramp up its investments in its metaverse project, which the company calls Reality Labs.
The combination of those factors crushed the business last year, sending profits tumbling and revenue declining.
However, it now seems like Meta is emerging from the worst of those challenges. It implemented layoffs to bring costs more in line with revenue. The worst of the impact of Apple's ad targeting changes has passed, and its TikTok-competitor product, Reels, continues to gain traction, though it's still monetizing at a lower rate than its other products. Meanwhile, the company's user base continues to grow. It crossed 2 billion daily active users on Facebook, and monthly active users across its family of apps increased 4% to 3.74 billion.
Since plunging following third-quarter earnings, the stock has rallied on favorable macro signals and the belief that shares were oversold. Including the after-hours gains, the stock has now doubled from its bottom just three months ago.
The company's first-quarter revenue guidance calls for $26 billion to $28.5 billion, implying another slight decline, but CEO Mark Zuckerberg expects to return to revenue growth later in the year as comparisons get easier and the company benefits from a more favorable currency exchange rate.
Is the stock a buy?
The company's results and guidance seem to have calmed the panic from last year, and Zuckerberg even called 2023 a "year of efficiency," saying the company is focused on becoming a "more nimble organization."
Investors had feared that costs would get out of control as the company spent on Reality Labs, but those fears now seem exaggerated as the company is clearly making an effort to rein in costs.
Despite its recent challenges, Meta is still a highly profitable business. The company is the dominant social media company globally, with Facebook, Instagram, and WhatsApp. Based on almost any conventional metric, the stock looks cheap if you assume the company can get back to steady bottom-line growth as CEO Mark Zuckerberg has promised. The $40 billion buyback authorization should also give it more firepower to beef up earnings per share.
While the bet on Reality Labs still looks risky, the company is aiming to grow operating profits even while scaling up its investment in its metaverse project.
If Meta can deliver on that bottom-line goal, the stock should be a winner from here. Shares are gaining because the company has proven it can take control of its costs and reassured investors that the business would return to growth. Once the economy starts to improve, that second part should take care of itself.
