Meta Platforms: Deeper Cuts Are Alarming

Summary:

• Meta Platforms, Inc. is set to undertake a massive shake-up, with plans to cut 10,000 employees and close 5,000 unfilled roles through May 2023.
• Employees will be bracing themselves for a nerve-wracking two months of uncertainty and “who’s next” questions. With such a massive scale of layoffs, could it impact employee productivity?
• Meta is facing significant structural challenges that require decisive action. Investors should be wary of the road ahead, with the company’s high-growth phase unlikely to return to its pre-pandemic levels.
• With Meta Platforms, Inc. valuation having normalized from November 2022, investors should brace for its “new economic reality.”

Meta Platforms, Inc. (NASDAQ:META) CEO Mark Zuckerberg has delivered his second massive cut to his workforce, one that topped out in FQ3’22 at 87.3K.

Adding on to the previous 11K cut, Zuckerberg will terminate another 10K jobs, bringing Meta’s slashed employee count to about 65K, just above where it stood in FQ2’21.

However, the upcoming cut will not be a one-time event, as the company will space out the cuts. Zuckerberg highlighted that the company will cut the “tech groups in late April,” followed by its “business groups in late May.” However, he added, “in a small number of cases, it may take through the end of the year to complete these changes.”

Hence, Meta employees will likely be waiting in “trepidation” as they anticipate their fate of who’s next over the next two months, which could impact productivity.

Layoffs of this scale could “decimate morale,” particularly for Meta, given its previous 11K layoffs. Moreover, it remains to be seen whether internal strife could erupt, reducing the intended productivity uplift of the second layoff.

However, Zuckerberg appeared to be pleased with the initial cuts, as he highlighted:

Since we reduced our workforce last year, one surprising result is that many things have gone faster. In retrospect, I underestimated the indirect costs of lower-priority projects. – Zuckerberg’s letter.

Coupled with the closing of 5K additional open roles not filled, Meta is giving advance notice of the firing plans, as Zuckerberg stressed:

But last fall, we heard feedback that you wanted more transparency sooner into any restructuring plans, so that’s what I’m trying to provide here. – Zuckerberg’s letter.

So for Meta employees, be careful of what you wish for. With that in mind, Zuckerberg outlined the “cultural principles” guiding the company’s year of efficiency: “Flatter is faster, leaner is better, returning to a more optimal ratio of engineers, building AI tools, in-person time.”

While the first four “principles” didn’t surprise us, the “in-person time” was somewhat unexpected. We thought C3.ai, Inc. (AI) CEO Thomas Siebel was exaggerating when he said, “If you want to work from home, like four days of work in your pajamas, go to work for Facebook.”

Zuckerberg’s missive contained “delicate” nuances to his employees about returning to the office as management continues to refine its “distributed work” model.

But he also made it clear that employees’ remote working days are likely over, as he stressed:

Our early analysis of performance data suggests that engineers who either joined Meta in-person and then transferred to remote or remained in-person performed better on average than people who joined remotely. – Zuckerberg’s letter.

Meta also filed an 8-K, revising its projections for total expenses for 2023. Accordingly, management now sees a full-year 2023 metric of $89B at the midpoint compared to its previous midpoint forecast of $92B.

That’s a significant reduction. But, we believe it’s too early to tell whether management sees further impediments to improving its top-line growth, behooving the company to rein in spending.

Furthermore, Zuckerberg alluded to such challenges as he highlighted the “new economic reality”:

At this point, I think we should prepare ourselves for the possibility that this new economic reality will continue for many years. Higher interest rates lead to the economy running leaner, more geopolitical instability leads to more volatility, and increased regulation leads to slower growth and increased costs of innovation. Given this outlook, we’ll need to operate more efficiently than our previous headcount reduction to ensure success. – Zuckerberg letter.

We don’t think Zuckerberg is overstating the impact of Meta’s challenges. eMarketer highlighted that “US display ad spend to grow by 15.7% in 2023.” However, the growth is expected to be driven by retail media ads as e-commerce players like Walmart (WMT) and Amazon (AMZN) bolster their presence.

Therefore, Meta will face competition from its social media arch-rival TikTok (BDNCE) and retail/e-commerce players with increasing clout with their omnichannel platform, undergirded by their highly valuable first-party data.

As such, we believe Meta seems to be on the defense now, putting its talented employees on the chopping block as it faces significant headwinds to recover its top-line growth cadence.

With that in mind, we urge investors to consider carefully whether META could return to the high-growth phase of its pre-pandemic days or, as Zuckerberg highlighted, a “new economic reality for many years.”

At an NTM EBITDA of 8.4x, we assessed that META’s valuation has normalized. Moreover, with META’s sum-of-the-parts, or SOTP, valuation highly dependent on its structurally weaker ad business, the margin of safety doesn’t seem attractive at these levels.

Also, Meta Platforms, Inc. momentum has continued to stall since its early February highs, suggesting that further consolidation and pullback should be expected.

Investors should consider using the sharp mean-reversion to cut some exposure in Meta Platforms, Inc. and layer out if they fished its November lows.

Rating: Sell (Reiterated).

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Disclosure: I/we have a beneficial long position in the shares of AMZN, META 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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