On Meta Platform's (META -4.13%) fourth-quarter conference call, CEO Mark Zuckerberg declared 2023 the "year of efficiency." True to his word, the company has taken several steps to become more efficient, including a recent round of layoffs where 10,000 positions were eliminated and 5,000 openings it hadn't filled were canceled.
It is unfortunate these workers lost their jobs, but investors cheered this move by sending the stock 7% higher. So, is Meta Platforms stock attractive enough to buy, or has that ship sailed?
Meta's profitability has fallen
Few stocks have had as good a start to 2023 as Meta, with its price rising more than 60% this year.
With movement like that, it would be easy to say the stock has run up too fast. But the run-up was justified when you look at the valuation that Meta Platforms posted to start 2023.
META PE ratio data by YCharts. PE = price-to-earnings ratio; PS = price-to-sales ratio.
While Meta Platforms has challenges, 2.1 times sales or 8.5 times earnings is too cheap for a company of its caliber. However, the stock might have reached its limits, with the price-to-earnings (P/E) ratio nearing its long-term average. But the price-to-sales (P/S) ratio is far from its average, indicating the stock could have more room to run.
So what is the discrepancy here? It all has to do with Zuckerberg's focus on efficiency.
The company spent a ridiculous amount of money on the metaverse. Its Reality Labs division lost nearly $14 billion in fiscal 2022. This caused Meta Platforms to lose the strong profitability investors counted on, although it still put up great numbers.
META profit margin data by YCharts.
The reduction of 21,000 jobs during two layoff rounds, mainly in mid-management and lower-priority projects, shows that Zuckerberg is willing to focus on what is essential to the company and shareholders.
The company will likely still post a massive loss in its Reality Labs division when it reports first-quarter results, but it will be less than before.
Is there more room for Meta to run?
Social media apps still drive revenue, but the metaverse dictates profits
Even though it often takes the backseat in discussions, Meta Platforms' breadwinner is still what it calls its Family of Apps, which includes Facebook, Instagram, and WhatsApp. In the fourth quarter, the apps division brought in $31.4 billion in revenue (down 4%) and made $10.7 billion in operating income (down 33%). The weakness in revenue had to do with a soft advertising market, which isn't a permanent headwind.
Once the economy recovers, businesses will be more willing to spend on advertising, boosting Meta Platforms' revenue. But is this enough to justify the current stock price? I'd say yes.
Meta entered the year trading as if no one would ever use its social media platforms again. But now that there has been a recovery, I'd say the stock has reached a reasonable valuation.
I'm still not convinced the Reality Labs division benefits the business. It was a massive drag on Meta's finances in 2022, despite making up a much smaller chunk of the revenue.
| Segment | 2022 Operating Expenses | Percent of Expenses | Operating Margin |
|---|---|---|---|
| Family of Apps | $71.8 billion | 82% | 37% |
| Reality Labs | $15.9 billion | 18% | (635%) |
Data source: Meta Platforms.
After this run-up, I would still avoid the stock. Until Meta Platforms can show that Reality Labs is a worthwhile project, it's going to be a massive drag, despite making up less than a fifth of revenue.
We'll know more when Meta reports first-quarter results, but that won't be until May. Until then, I will stay away from the stock and look at some more-attractively valued stocks.
