Thesis
Meta Platforms, Inc. (NASDAQ:META) stock is up more than 4% pre-market after news surfaced that the social media giant is planning for mass layoffs that could affect more than 11.000 workers. Although I feel for the people affected, as an investor I cheer the news.
Given that Meta’s revenue growth slowed sharply in 2022, analysts have frequently pointed out that the company needs to show more financial discipline. And CEO Mark Zuckerberg’s commitment to reduce headcount aggressively should, without a doubt, send a strong signal that profitability remains one of the company’s core priorities.
Personally, I estimate that various cost savings could add up to approximately $1.5 – $2 billion annually. Assuming a P/E multiple of x15, this could strengthen Meta’s market capitalization by $22.5 to $30 billion.
For reference, Meta stock is down 71.5% YTD, versus a loss of approximately 20% for the S&P 500 (SPY).
Meta Cuts Headcount By 13%
According to various reports from leading financial outlets, Zuckerberg send an email to employees that communicated by far the largest headcount reduction in the company’s history. Bloomberg reported that the number of affected employees could reach 13% of Meta’s current headcount, which translates to as much as 11,000 people.
Although further information regarding the layoff structure is pending, it is likely that employees across divisions are affected, with a likely focus on the human resources and content moderation department.
All employees in the U.S. (and likely also all non-U.S. employees) will reportedly receive a severance package that amounts to 16 weeks of base pay. Moreover, employees will receive an additional two weeks of pay for every year they worked with Meta.
Cost Savings Could Add $30 billion of Market Value
It is hard to precisely estimate how Meta’s cost-savings programs will translate into a profitability expansion. But assuming that the average annual cost per employee for Meta is somewhere between $115.000 and $135,000, including benefits and overheat expenses, then cost-savings would likely total $1.25 billion – $1.37 billion annually.
Investors should consider that headcount reductions are not the only savings programs considered by Meta Platforms. The company has also voiced efforts to reduce its real estate footprint and other operating cost. Personally, I estimate that such cost-savings programs could reduce operating expenses by an incremental 75 – 125 basis points, or, in financial terms, between $625 million – 1,050 million.
In sum, I believe it is reasonable to assume that Meta’s savings ambitions will likely reduce operating expenses by approximately $1.5 – $2 billion annually. Assuming a P/E multiple of x15, this could strengthen Meta’s market capitalization by $22.5 to $30 billion.
Investor Implication
As an investor, I cheer Zuckerberg’s unprecedented headcount reduction – it highlights the company’s commitment to profitability. And investors are right to push the stock higher following the announcement.
Investors should note that “operating discipline” has become a major concern for investors, as Meta’s expenses as a percentage of revenue have steadily increased…
… which caused net income to drop sharply …
… and free cash flow to fall to as low as $173 in Q3 2022, versus $9.5 billion for the same period one year earlier.
Still More To Come?
Personally, I believe that there are still more “savings” to come. Investors should consider that following the takeover of Twitter, Elon Musk pushed a 50% reduction of the 7,500-strong workforce, with initial estimates aiming for a 75% reduction.
Why shouldn’t Meta push for a similarly high headcount reduction? Assuming that Meta’s size favors economies of scale, and assuming that AI investments pay-off to enable more automation for content moderation and other tasks, then I feel that Zuckerberg could push for an additional round of lay-off that could rival the first/current – with respective implications for profitability and implied market capitalization.
Valuation Still Ridiculous
Meta’s stock is valued ridiculously attractive. According to consensus data compiled by Seeking Alpha, Meta stock is trading at a one year forward EV/EBIT of x8 – which would imply a discount to the sector median of as much as 44%.
Mostly as a function of valuation, but also because I like Zuckerberg’s metaverse ambitions, I remain super-bullish on Meta stock. And I continue to believe that the company’s fair implied value should be around $257.93.
Following an increased focus on operating profitability, I reiterate a “Strong Buy” rating for Meta stock.
Read More: Meta: Headcount Reduction Could Add $30 Billion To Market Capitalization (NASDAQ:META)