Meta Platforms Q4 2022 – No diet.

There is still lots of fat to cut.  

• Meta reported results that were better than feared, announced an efficiency drive as well as a $40bn share buyback which was exactly what investors wanted to hear but I suspect it could do far more.
• Q4 2022 revenues / EPS were $32.2bn (down 4% YoY) / $1.76 compared to forecasts of $31.7bn / $2.24.
• This indicates that Meta’s properties are faring better than its smaller competitors as the number of users is still growing at 4% YoY and engagement with those properties remains strong.
• At the same time, the company reduced its estimate for 2023 expenses to $89bn – $95bn ($92bn) down from $94bn – $100bn ($97bn).
• To mollify the market further, the company has also reduced its capex budget by $4bn and increased its share buyback program by $40bn.
• This strategy has worked as the shares rallied by 20% in after-hours trading to add to their already excellent run in 2023.
• This is an improvement but still represents a small fraction of what could be achieved if Mr Zuckerberg really wanted to put the pedal to the metal.
• Mr Zuckerberg is using these results to highlight that 2023 is going to be a year of efficiency but there is far more that he can do beyond cutting expenses by a measly $5bn.
• Meta Platforms spent a lot of the conference call touting its excellence in AI, but this has yet to translate into any return for investors.
• All through the good years Meta Platforms loaded up with content moderators because its machines were not good enough to effectively moderate content.
• Now that its AI is helping advertisers improve their conversion rates on Reels, attention should be turning to content moderation because this is how real efficiency can be achieved.
• If what Meta says about its AI is true, it should now be in a position to start shedding all of the staff that are now surplus to requirements which I suspect is a very large number.
• Based on its hiring between 2017 and 2020 when its AI was not up to the job, I suspect that 30,000 or more of its personnel could be removed with no meaningful impact on the Meta Platforms’ social networking properties.
• Headcount is still 86,482 meaning that there is space for a 35% headcount reduction from here with those savings flowing directly to the bottom line.
• This is a meaningfully lower cut than Twitter has made, and yet the service is still running with no noticeable differences.
• However, even with the meagre cuts that have been put through, things look a little better.
• If revenues grow by 5% to $123bn (generous) then with OPEX of $92bn, EBIT would be around $31bn.
• This would give $24bn after tax or $8.88 per share in 2023 which after last night’s rally puts the shares on 20.6x 2023 PER.
• In my opinion, this is too high for a company that will report flat earnings in 2023, but clearly, the voting machine of the short-term market is against me.
• Unless something really goes wrong, it looks like the trough multiple for this stock will be around 20x meaning that there could be a lot of upside if Mr Zuckerberg decides to turn his company into a cash machine.
• I don’t think he is likely to do that, and so further upside is likely to require multiple expansion which is a big ask in this market.
• I would not chase Meta Platforms here.