Meta: Downsizing could add $30 billion to market cap (NASDAQ:META)

Thesis

Meta Platforms, Inc. (NASDAQ: META) shares rose more than 4% before market after news surfaced that the social media giant was planning massive layoffs that could affect more than 11,000 workers. Even though I feel for people affected, as an investor, I applaud the news.

Since Meta’s revenue growth has slowed sharply in 2022, analysts have frequently stressed that the company needs to exercise more financial discipline. And CEO Mark Zuckerberg’s commitment to aggressively downsizing should, no doubt, send a strong signal that profitability remains one of the company’s top priorities.

Personally, I estimate that various cost savings could amount to approximately $1.5 to $2 billion per year. Assuming a P/E multiple of x15, this could boost Meta’s market capitalization by $22.5 billion to $30 billion.

For reference, Meta stock is down 71.5% year-to-date, compared to a loss of around 20% for the S&P 500 (SPY).

Meta reduces its workforce by 13%

According to various reports from major financial outlets, Zuckerberg sent an email to employees who communicated by far the largest downsizing in company history. Bloomberg reported that the number of affected employees could reach 13% of Meta’s current workforce, which is up to 11,000 people.

While further information regarding the structure of the layoffs is pending, it is likely that employees across all divisions will be affected, with a likely focus on the HR department and content moderation.

All US employees (and likely all non-US employees as well) will receive severance pay equal to 16 weeks of base pay. In addition, employees will receive two additional weeks of salary for each year of working with Meta.

Cost savings could add $30 billion in market value

It is difficult to accurately estimate how Meta’s cost reduction programs will translate into increased profitability. But assuming that the average annual cost per employee for Meta is between $115,000 and $135,000, including benefits and overheating expenses, the cost savings would likely total $1.25 billion to $1.37 billion. per year.

Investors should consider that workforce reductions are not the only savings programs being considered by Meta Platforms. The company also reported on its efforts to reduce its real estate footprint and other operating costs. Personally, I estimate that such cost-cutting programs could reduce operating expenses by an additional 75 to 125 basis points, or, in financial terms, between $625 and $1,050 million.

In summary, I think it’s reasonable to assume that Meta’s savings ambitions will likely reduce operating expenses by around $1.5-2 billion per year. Assuming a P/E multiple of x15, this could boost Meta’s market capitalization by $22.5 billion to $30 billion.

Investor involvement

As an investor, I applaud Zuckerberg’s unprecedented downsizing — it highlights the company’s commitment to profitability. And investors are right to push the stock higher after the announcement.

Investors should note that “operational discipline” has become a major concern for investors, as Meta spend as a percentage of revenue has steadily increased…

… which caused the net result to fall sharply …

…and free cash flow will drop to $173 in Q3 2022 from $9.5 billion in the same period a year earlier.

More to come?

Personally, I believe there are even more “savings” to come. Investors should consider that following the Twitter takeover, Elon Musk pushed for a 50% cut of 7,500 employees, with early estimates calling for a 75% cut.

Why shouldn’t Meta be pushing such a high downsizing? Assuming the size of Meta favors economies of scale, and assuming the investments in AI pay off to enable greater automation of content moderation and other tasks, then I think Zuckerberg could be pushing for a new series of layoffs that could rival the first/current one – with respective implications on profitability and implied market capitalization.

Valuation always ridiculous

Meta shares have a ridiculously attractive value. 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 up to 44%.

Mainly based on valuation, but also because I like Zuckerberg’s metaverse ambitions, I remain super bullish on Meta stocks. And I still believe that the implied fair value of the business should be around $257.93.

Following an increased focus on operational profitability, I reiterate a “Strong Buy” rating for Meta stock.