How Do Meta Platforms’ Layoffs Impact Their Stock Outlook?

Elevator Pitch

I rate Meta Platforms, Inc.’s (NASDAQ:META) shares as a Buy.

In my prior September 8, 2022 write-up for META, I highlighted that “slower-than-expected headcount growth” is one of the key catalysts for Meta Platforms. This catalyst relating to the moderation in headcount expansion has been realized taking into account META’s recent announcements, and the company’s layoffs are the focus of the current article.

I believe that there should be a better alignment of Meta Platforms’ costs and revenue in the future taking into account its layoff plans, which will boost META’s 2023 profitability. As such, I maintain a Buy rating for META.

META Stock Key Metrics

There are some key metrics pertaining to META’s layoff plans that are worth noting.

Earlier, Meta Platforms published an article titled “Mark Zuckerberg’s Message to Meta Employees” in the “Newsroom” section of its corporate website on November 9, 2022. In this article, META’s CEO Mark Zuckerberg mentioned that the company has “decided to reduce the size of our team by about 13% and let more than 11,000 of our talented employees go”, while “extending our hiring freeze through Q1.”

In comparison, META’s headcount has been on a rising trend since the beginning of this year. The number of employees that Meta Platforms had as of end-2021, end-Q1 2022, end-Q2 2022, and Q3 2022 were 71,970, 77,805, 83,553, and 87,314, respectively as per its prior 10-K and 10-Q filings. In other words, Meta Platforms’ headcount should decline to slightly above 76,000 following the completion of its planned layoffs, which implies that META’s staff strength will be back to end-March 2022 levels.

Why Is Meta Platforms Laying Off Employees?

The factors that drove Meta Platforms’ employee layoffs can be found in Mark Zuckerberg’s message for its staff (referred to in the preceding section) and the company’s Q3 2022 10-Q filing.

In his message for the company’s employees, Mark Zuckerberg acknowledged that “our revenue outlook is lower than we expected”, and he emphasized that META’s recent initiatives like resource re-allocation and expense optimization measures “won’t bring our expenses in line with our revenue growth.”

It is worthy to note that Meta Platforms’ Q4 2022 top line guidance issued in late-October was disappointing. Specifically, META expects the company to generate a revenue of between $30.0 billion and $32.5 billion for the final quarter of this year. This translates into a fourth quarter revenue of $31.25 billion for Meta Platforms based on the mid-point of its guidance, and this is equivalent to a -7% YoY top line contraction. More importantly, the Wall Street analysts had anticipated that META’s revenue will decline by a narrower -4% on a YoY basis in Q4 2022 prior to the company’s most recent management guidance disclosure.

Separately, a comparison of META’s Q3 2022 and Q2 2022 10-Q filings also offers clues about the thinking behind the company’s decision to do layoffs.

Meta Platforms mentioned in its Q2 2022 10-Q filing that “we plan to continue to hire employees” so as “to support our operations.” This particular statement was removed from the company’s latest Q3 2022 10-Q filing.

Instead, META revealed in the company’s Q3 2022 10-Q filing that it has “recently undertaken cost reduction measures in light of a more challenging operating environment”, and noted that “some of these measures may involve up-front charges and outlays of cash to reduce certain longer-term expenses.”

In a nutshell, META is suffering from a misalignment between costs and revenue, and the company has decided to utilize layoffs as one of the expense optimization initiatives to address this issue.

As an illustration, Meta Platforms’ operating costs increased by +32.6% for fiscal 2021, and this did pay off with a higher +37.2% growth in the company’s revenue last year. In contrast, META is most probably going to record a single-digit decline in its full-year revenue for fiscal 2022 based on its Q4 guidance, so there is no justification for higher expenses and increased investments.

How Will The Layoffs Impact Meta Platforms’ Business Outlook?

The layoffs and the moderation in headcount growth are expected to have a positive impact on Meta Platforms’ business outlook.

In an 8-K filing issued on November 9, 2022, META noted that the company has reduced the midpoint of its guidance for total expenses in 2023 from $98.5 billion previously to $97 billion now. The midpoint of Meta Platforms’ 2023 capital expenditures guidance was also cut from $36.5 billion earlier to the current $35.5 billion estimate. Meta Platforms has made these changes to its 2023 management guidance in view of its “plan to add fewer employees in 2023 than we previously expected” as highlighted in its recent 8-K filing.

Based on my calculations, Meta Platforms’ updated 2023 guidance provides a high single-digit percentage boost to the company’s bottom line next year.

There are also two key items that investors should pay attention to.

Firstly, the layoffs and other cost optimization measures should not affect Meta Platforms’ revenue in a meaningful way. Meta Platforms emphasized in its November 2022 8-K filing that it is maintaining its Q4 2022 revenue guidance that it provided in late-October. This shouldn’t be a surprise, as META’s weak near-term revenue outlook is largely attributable to weak macroeconomic conditions, rather than a lack of investments to support top line growth.

Secondly, Meta Platforms’ actual expenses for FY 2023 might turn out to be even lower than the company’s current guidance, taking into account its track record. As an illustration, META initially guided in October 2021 that its fiscal 2022 expenses will be in the $91-97 billion range, but the company has already lowered its FY 2022 expense guidance to between $85 billion and $88 billion in October this year.

What Are Analysts Saying?

While it is important that META is doing the right thing by pulling cost levers, it is also critical that the investment community has a favorable view of the company’s actions. As such, it is necessary to see what analysts are “saying” and thinking about Meta Platforms’ recent cost optimization moves like layoffs.

A November 9, 2022 Seeking Alpha News article cited comments from MKM Partners’ analyst noting that META’s planned layoffs were “a step in the right direction, essentially demonstrating that Zuckerberg cares about near-term investor expectations.”

Seeking Alpha News subsequently reported on November 19, 2022 that Meta Platform was “among new names in UBS (UBS) 2023 stock focus list” on the basis that META “is now taking steps to be more capital efficient (e.g., layoffs)” and that “could be a source of earnings upside through 2023.”

Also, there have been no new sell-side analyst rating downgrades in November 2022 thus far following the layoff announcements, as per data taken from Seeking Alpha.

Therefore, it is reasonable to conclude that analysts in general are viewing Meta Platforms’ recent layoff plans in a positive light.

What Is The Long-Term Stock Outlook?

I take the view that the long-term outlook for Meta Platforms’ stock is good due to two key reasons.

The first reason is that the growth prospects of the global digital advertising market in the long run remain decent. According to Greenwich Capital Group‘s most recent Q3 2022 Adtech & Marketing Services industry update report, the size of the worldwide digital advertising market is expected to grow at a healthy 14% CAGR for the 2022-2026 period, while the digital advertising penetration rate is projected to rise from 66% to 74% in the same time frame.

The second reason is that META has the potential to drive greater monetization for some of its products and services. In my September 8, 2022 article, I touched on “early signs that Reels’ rate of monetization could exceed expectations.” Separately, a November 18, 2022 Seeking Alpha News article cited Zuckerberg’s comments that META aims to “monetize WhatsApp and Messenger more”, based on his views that “business messaging is probably going to be the next major pillar” for Meta Platforms.

Is META Stock A Buy, Sell, Or Hold?

META stock continues to be rated as a Buy. I have considered the effects of Meta Platforms’ recent layoff plans, sell-side analysts’ sentiment towards the stock, and the company’s long-term outlook in deciding on a Buy rating for its shares.