Meta Continues To Increase Efficiency

Summary:

• Meta is becoming more efficient and showing progress in improving financial results.
• The company has undergone restructuring efforts, resulting in layoffs and cost reductions.
• Meta is focused on increasing revenue through initiatives like click-to-message ads and expects revenue to grow in the future.

Introduction

Per my June article, Meta Platforms (NASDAQ:META) has stated they are getting leaner, and I wrote that we need to keep an eye on how they follow through. The 2Q23 numbers show more progress, and my thesis is that Meta is continuing to get more efficient.

The Numbers

Looking through the 2Q23 numbers, we need to hold CEO Mark Zuckerberg responsible for what he said in the 4Q22 call (emphasis added):

I am also focused on delivering better financial results than what we have reported recently and on meeting the expectation that I outlined last year of delivering compounding earnings growth even while investing aggressively in future technology.

Meta was more efficient back in 2021 with operating income of $46,753 million on revenue of $117,929 million for a margin of nearly 40%. Meta doesn’t necessarily need to beat this operating margin in the future, but they do need to beat the $46.8 billion operating income figure in order to compound earnings. The cost of revenue in 2021 was $22,649 million, which was 19% of revenue. R&D was only 21% of revenue at $24,655 million. Marketing was $14,043 million or 12% of revenue and G&A came in at $9,829 which was 8% of revenue. The operating margin has been compressed since that time as R&D has climbed dramatically as a percentage of revenue per the 2Q23 slides, reaching a peak of 33% in 3Q22 and 1Q23:

I’m optimistic about Meta delivering compounding earnings growth in the future such that we beat the annual operating income figure of $46.8 billion soon. 2Q23 shows we’re going in the right direction. The 2Q23 headcount is lower as management has been taking steps to make employees more efficient and lower the headcount from the peak of 87,314 in 3Q22:

	Headcount
1Q21	60,654
2Q21	63,404
3Q21	68,177
4Q21	71,970
1Q22	77,805
2Q22	83,553
3Q22	87,314
4Q22	86,482
1Q23	77,114
*2Q23	71,469

Click to enlarge

*Approximately half of the employees impacted by the 2023 layoffs are included in the reported 2Q23 headcount above. The count for the 2023 layoffs was 10,000, so I take this to mean the 71,469 headcount will come down by another 5,000.

The 2Q23 10-Q explains restructuring efforts, showing approximately 11,000 employees were laid off due to the “2022 Restructuring.” As of June 30, 2023, these layoffs have been completed. The 1H23 sub-total for this restructuring was $804 million made up of $(153) million cost of revenue, $632 million R&D, $178 million marketing, and $147 million G&A. The 2Q23 also reveals the “2023 Restructuring” announced in March, which impacts approximately 10,000 employees. Some of these “2023 Restructuring” layoffs may take until the end of 2023 or longer to complete. The 1H23 sub-total for this restructuring was $1,119 million composed of $466 million R&D, $222 million marketing, and $431 million G&A. Taking rounding into account, the amount of approximately $804 million from the “2022 Restructuring” plus the amount of approximately $1,119 million from the “2023 Restructuring” added up to $1,924 million for 1H23 per the 2Q23 release:

Note that $1.64 billion of the $1.92 billion above comes from the family of apps segment and just $0.28 billion comes from the RL segment. The $1,924 million above is just for the first half of 2023 and the 1Q23 release says the total for the year will be about $4 billion (emphasis added):

We anticipate our full-year 2023 total expenses will be in the range of $88-$91 billion, increased from our prior range of $86-$90 billion due to legal-related expenses recorded in the second quarter of 2023. This outlook includes approximately $4 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We expect Reality Labs operating losses to increase year-over-year in 2023.

2Q23 is the first quarter which is starting to look more like the 2021 quarters in the free cash flow (“FCF”) line of the FCF Reconciliation slide:

Valuation

Efficiency improvements are only part of the valuation equation. Meta is also taking steps to increase revenue such that earnings will compound even if we don’t get all the way back to some of the wonderful margins we saw in the past.

Finance VP Chad Heaton talked about the way we’re in the incipient stage with click-to-message revenue in the 2Q23 follow-up call, saying click-to-Messenger is the largest piece but click-to-WhatsApp is growing 80% year-on-year. VP Heaton also said click-to-message ads are mainly used by smaller advertisers because they can be an alternative to a website or an app. Meta is focused on scaling this channel by investing in optimization objectives for more complex needs. Additionally, they think businesses will be able to increase usage of this segment soon by responding to messages with AI agents. These are some of the many ways in which I expect Meta to increase overall revenue in the quarters ahead.

3Q23 revenue is expected to be $32-$34.5 billion, and the midpoint of $33.25 billion is 20% higher than the 3Q22 figure of $27.71 billion. Trailing twelve months (“TTM”) operating income is just $28.7 billion or $16,619 million + $28,944 million – $16,881 million, but I expect TTM operating income to pass the 2021 figure of $46.8 billion in the near future. A multiple of 15 to 20x 2021 operating income gives us a valuation range of $700-$935 billion.

The 2Q23 10-Q shows 2,222,582,542 A shares plus 350,578,831 B shares as of July 21st for a total of 2,573,161,373. The market cap is nearly $815 billion, based on the August 7 share price of $316.56. The market cap is inside my valuation range, so I think the stock is a hold.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of META, AAPL, AMZN, GOOG, GOOGL, VOO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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