Meta Platforms – Give and take pt. II

About half of the savings will materialise.

• Meta Platforms has announced further job cuts which will help reduce expenses but the renewed subsidisation of the Metaverse may well eat up some of these savings leading to less change on the bottom line than expected.
• A further 10,000 positions are to be eliminated (around 13% of the already reduced workforce) as Mr Zuckerberg again responds to the market pressure for cost efficiency.
• This should deliver something in the region of $2.5bn in reduced personnel expenses which, all things being equal, should flow to the bottom line.
• The example that Twitter is setting is that social media can function pretty well with a greatly reduced headcount which combined with tougher economic times has exposed just how bloated many of these companies are.
• Meta Platforms is no exception and I have long suspected that it could probably halve its workforce and suffer no meaningful impact on the quality and reliability of its products.
• I do not expect it to go nearly that far but this is how far it could go if things became really difficult.
• This sounds great for investors who are hoping for the earnings estimate to continue rising but first one has to factor in the impact of Reality Labs.
• Reality Labs contains all of the assets that are focused on the Metaverse and this division loses billions of dollars every quarter.
• A proportion of this is due to the heavy subsidisation of the Quest 2 and the Quest Pro both of which have recently been reduced in price which will further increase losses at this division.
• I would estimate that hardware subsidisation costs somewhere around $750m per quarter which combined with the Quest 2 being a pretty good product have fueled Meta’s leadership in this space.
• In Q4 2022, Reality Labs lost a jaw-dropping $4.3bn bringing losses to the full year to $13.7bn.
• Zuckerberg is justifying these investments with the view that in the next generation of digital devices, Meta has to own the platform or face being raked over the coals exactly as it has been in smartphones.
• This is referring to the fact that in smartphones, Meta is at the mercy of Apple and Google which control the platforms from which it derives most of its revenue.
• This issue has been a sore spot recently, as Apple’s privacy policies have done significant damage to Meta’s advertising business which is a humiliation that Meta has sworn not to repeat.
• This, combined with Mr Zuckerberg’s absolute faith in the Metaverse, is why it is investing so aggressively.
• Meta is the dominant force in VR today and it is only on its platform that developers can make any money meaning that they develop for Oculus first.
• However, the $100 price increase put through in the middle of last year on the Quest 2 caused demand for the device to collapse which has now been reversed.
• If Oculus volumes go back to 1m a month which is where they were before the price hike, then this would increase the losses at Reality Labs by $1.2bn a year.
• This means that roughly half of the $2.5bn in savings from this latest will go to the bottom line giving total cost savings realized in profit this year could be somewhere around $5bn.
• Meta’s current guidance for expenses is $89bn – $94bn which with these cost cuts should end up around $84bn – $89bn.
• If revenues grow by 5% to $123bn (generous) then with OPEX of $86.5bn, EBIT will be around $36.5bn.
• This would give $29bn after tax or $10.98 per share or a 2023 PER of 17.6x.
• This is 27% YoY growth over 2022 but still 20% below what it was in 2021.
• I am not convinced that sustainable growth is back at Meta Platforms yet and that one would need to see a real return to growth to justify a multiple this high.
• I still would not chase this stock although I do have indirect exposure to the stock through a structured product.