A "year of efficiency" -- that's how Meta Platforms (META -4.13%) CEO Mark Zuckerberg is characterizing a wave of cost cuts at his company. In a note to investors and employees on March 14, Zuckerberg described the economic slowdown in 2022 as a wake-up call after years of seemingly unabated growth for Meta. The company had to adapt to this new environment, and the CEO is now answering the call.
Zuckerberg painted a relatively grim outlook for the broader economy, but his awareness of that potential scenario combined with Meta's planned response is exactly why investors should buy the stock. Let me explain.
Meta prepares for tough times ahead
Meta shareholders have grown especially vocal about the company's disappointing financial performance over the last 12 months. Meta had expanded its workforce at a rapid pace in the past, and it continues to invest billions of dollars in its aspirations for a virtual world called the metaverse, which is housed under its Reality Labs segment.
But those moves no longer jibe with the company's reality: Its quarterly revenue growth hit stall-speed throughout 2022, and actually shrank in the second, third, and fourth quarters, year over year, which decimated its earnings potential. Meanwhile, Meta's core platforms Facebook and Instagram have been under threat from ByteDance's TikTok, the short-form video app sweeping the globe.
Investors weren't seeing an appropriate response from management, and they subsequently sent Meta stock on a peak-to-trough plunge of 76%.
Thankfully, Zuckerberg rose to the challenge. In November last year, he announced Meta would lay off 11,000 employees and more carefully manage costs across the business. Plus, he committed to placing additional focus on the Reels feature within Facebook and Instagram, which uses artificial intelligence (AI) to curate content feeds -- this was developed to compete directly with TikTok. The shift in strategy was enough to halt the investor exodus.
In his letter last week, Zuckerberg says the adjustments so far have led to an overall improvement in performance, and that prompted the company to look even more closely at ways it could further improve its efficiency. Meta has identified 10,000 more jobs it plans to cut in 2023, which will help to flatten the organizational hierarchy, streamlining reporting and preventing technical projects from overlapping. These are key decisions because Zuckerberg suggested Meta is preparing for this tough economy to last for many years to come.
Reality Labs is the opposite of what Meta needs right now
While the metaverse concept still has potential, Reality Labs' recent financial performance has been a drag on the entire company's earnings. Most analysts don't expect the metaverse to generate any meaningful revenue for years. In that context, it's clear why Meta's investors have voiced concerns about its excessive spending on the project.
Take the fourth quarter of 2022, for example. Reality Labs generated just $727 million in sales, which not only underperformed the rest of the company for growth, but it was also a dismal return on the $5 billion of expenditures reported. Its subsequent operating loss of $4.3 billion was the segment's worst quarterly result to date.
That operating loss ate into Meta's $10.7 billion in operating income generated by its highly profitable family of apps (Facebook, Instagram, and WhatsApp). When we boil it down to the bottom line, Reality Labs was a major cause of the company's 55% plunge in net income year over year.
Here's why Meta Platforms stock is a buy anyway
In the fourth-quarter conference call, Mark Zuckerberg said the company's focus on efficiency is companywide, and it includes Reality Labs. But that doesn't mean the project will lose less money this year. Susan Li, the company's chief financial officer, told investors to expect increased Reality Labs losses in 2023 because the company thinks the segment is a key piece of its long-term future.
Zuckerberg envisions 1 billion users in his company's metaverse eventually, and they could each be spending hundreds of dollars on digital goods and services. That fits with external estimates about the industry's value. Bloomberg Intelligence, for example, predicts the opportunity could be worth $800 billion as soon as 2024.
But setting that aside, the broad cuts to Meta's cost structure point to a more profitable company overall in the coming quarters. Plus, its focus on AI on its existing social media platforms could lift user engagement, which would in turn attract more advertising dollars from businesses.
Meta stock has soared 132% from its 52-week low of $88.09. Even so, based on its 2022 results, it trades at a price-to-earnings (P/E) ratio of 23.8, which is a slight discount to the 25.1 P/E of the Nasdaq-100 technology index.
Thanks to the company's focus on efficiency, analysts have already lifted their estimates for earnings per share for both 2023 and 2024, so its P/E looks even cheaper measured against the future. That paves the way for longer-term upside in Meta stock. By all accounts, it's not too late for investors to buy in.
