Social media giant Meta Platforms (META 1.95%) is slashing jobs as it has been working on improving its bottom line. Those efforts, as well as others, have given investors reasons to be bullish on the stock of late, with shares of Meta up around 70% so far in 2023. Those gains clawed back some of the sizeable losses it incurred in 2022 when the stock plummeted 64%.
Has this tech giant changed enough to make the stock a good buy today? Is this rally likely to continue, or should investors hold off on buying Meta Platforms' stock?
Why Meta Platforms struggled last year
Meta had a horrible 2022 not just due to the bear market, but also because its results simply weren't as good as they were in the past. Its profit margin is a good example as it has been crashing in recent quarters.
While annual revenue of $116.6 billion was down just a modest 1% last year, the company's bottom line crashed by 41% to $23.2 billion. It has been spending much more on overhead and research and development. One particularly sore spot has been its expenditures on the metaverse, which is captured within its Reality Labs segment. That area of its business incurred an operating loss of $13.7 billion, on top of an already steep $10.2 billion loss in the previous year.
By comparison, its family of apps segment (this includes Facebook, Instagram, Messenger, and WhatsApp) generated an operating profit of $42.7 billion -- although that was down 25% year over year.
Meta's business is now bloated with expenses and, without a corresponding increase in revenue, investors have been wary that the company may be going in the wrong direction.
Why it's doing better in 2023
Things are going better for Meta this year as the company now appears to be taking its expenses more seriously. Last year, the company announced 11,000 job cuts, and this year it says it will be eliminating another 10,000 positions. Investors saw that as a positive for the business as the stock rose on the news, as it means that Meta's financials should see some improvement.
As of the end of 2022, the company's headcount was 86,482, which was 20% higher than in the previous year. Meta management says that number includes a substantial majority of the 11,000 employees mentioned above. They will no longer be reflected in the company's headcount by the end of the first quarter of 2023.
A big catalyst behind the tech stock's rally this year could be news of the growing pressure in the U.S. to ban the social media app TikTok, a major competitor that soared in popularity in recent years. U.S. lawmakers from both sides of the aisle have voiced concerns about national security and what user information TikTok may be sharing with the Chinese government. Recent government hearings on the matter could lead to legislation, according to several congressional offices.
Potentially removing one of Facebook's main rivals, or at the very least, making it more difficult for people to use the platform, would be a huge win for Meta, as it would help keep more users on its apps and sites. If that happens, more advertising revenue could flow back into Meta's business and improve its financials.
Between the cost-cutting efforts and the potential crackdown on TikTok's use in the U.S., investors have been increasingly bullish on Meta's stock.
Why Meta Platforms is still a risky buy
Trimming expenses is a positive but the problem with Meta's business right now is that it's still spending heavily on its metaverse projects. And as long as it keeps its focus and sizeable resources here, there will be much more spending and reported losses on what is considered by many to be an incredibly risky venture. It's the reason I sold my shares in this tech stock. While Meta may be reducing a lot of overhead, it still might not be doing enough to significantly improve its margins.
Until CEO Mark Zuckerberg says the company is going to pull back from the metaverse, I don't see a reason to go on what could be a roller-coaster ride with the stock. Although Meta's share price is up big this year, those gains could evaporate quickly if the company doesn't start showing some real significant improvement in its financials.
