Club holding Meta Platforms’ (META) announcement on Wednesday that it is laying off approximately 13% of its workforce, or more than 11,000 employees, is a sign to us that CEO Mark Zuckerberg, in the words of Jim Cramer, “has religion” when it comes to trying to control the company’s uncontrollable costs. While we don’t welcome people losing their jobs, we would like to point out that the severance packages seem generous, and we hope they can mitigate some of the blow for those unfortunate to be included in these reductions. of staff. Meta jumped about 8.5% in Wednesday trading on job cut news. But there is still plenty of ground to make up after its 24.5% post-earnings tumble on Oct. 27. Even with Wednesday’s gain, Meta’s stock was still down nearly 69% year-to-date and one of the worst performers of 2022 of any S&Corporate P 500. Painful as that is job cuts, especially in this economic climate, we believe this move was necessary after Facebook’s parent company posted dismal third-quarter results and a weak outlook last month. Management at the time guided a mid-ten percentage point increase in spending, in direct contrast to investors’ desire to see spending decline and spending growth fall more in line with revenue projections. Jim had been asking Meta and other tech companies for months to recognize the seriousness of global macro headwinds and cut costs. We are therefore delighted to see management finally showing signs of realizing the realities of the operating environment in which we find ourselves. In a letter to employees regarding the layoffs, Zuckerberg wrote, “We are also taking a number of additional steps to become a leaner, more efficient company by reducing discretionary spending and extending our hiring freeze through the first quarter. ” In a Securities and Exchange Commission filing on the layoffs, Meta quantified its efficiency efforts, saying the team now expects total 2023 spending to be between $94 billion and $100 billion, compared to 96 to 101 billion dollars with the third. publication of quarterly results. The revised guidance reflects “management’s plan to add fewer employees in 2023 than expected as we significantly slow our hiring trajectory through early 2023.” Contributing to the lower cost outlook, management now expects capital expenditure (capex) to be between $34 billion and $37 billion, a reduction at the high end of the $34 billion to $39 billion range previously forecast. Notably, however, management’s expectations that Reality Labs’ losses will “increase significantly year over year” remain unchanged. Reality Labs is the virtual reality and metaverse segment of the company. As a knock-on effect, this reduction in Meta’s capital spending may be driving some of the pressure we’re seeing in semiconductor stocks, an area that attracted bid following the initial guidance. Meta expenses. However, as we noted at Wednesday’s Morning Meeting, we are not looking to trim our positions in semiconductors based on this news. Members can examine the dynamics of cloud and data center spending and semiconductor company sales in our guide to the chip industry and how it works. While Meta’s layoffs are just the beginning, we believe it may take more, as in the past year alone, in the third quarter, the company added approximately 19,000 employees to its workforce. Members will recall that prior to the third quarter release, Brad Gerstner of Altimeter Capital Management, a long-term Meta shareholder, called for several key changes that he said would serve to double free cash flow to 40 billions of dollars a year and to “focus the company’s teams and investments.” In an Oct. 24 open letter to management, Gerstner called for a number of actions. At least a 20% staff reduction; Effectively release all employees hired in the past year. Reduction of annual investments by at least $5 billion; instead, management has guided a $2 billion capex cut in 2023 at the high end of its previous range, as discussed in more detail earlier. Limit metaverse-focused investments “to no more than $5 billion per year.” Looking at these steps, which have been very well received by Wall Street, it is safe to say that while Wednesday’s news is a start, it is just that, a start. Achieving the first stage would require around 6,000 additional layoffs. In terms of other spending, while the reduction in the top end of capex is welcome, we are clearly a long way from the $25 billion that investors would like to see and clearly management has no intention of slowing down the rate of investment in the Reality Labs segment. Here’s a look at Wall Street’s reaction to the news. JPMorgan analysts said: “While we had hoped the 2023 spending outlook would decline further, the overall downsizing is likely larger than most people expected and shows that management is operating with discipline. increased, especially after a difficult period of nearly 2 weeks since the Q3 Earnings report.” In their view, the move could “theoretically remove about $8 billion in costs on an annualized basis.” UBS analysts said: “We believe that Meta cost reductions – through opex [operating expenditures] and capex – signals that the company is hearing investors, and we think stocks can rise.” At RBC, analysts see a good chance that management will cut its spending guidance throughout the year, noting that in 2022, realized operating expenses are expected to be on track to be approximately 10% lower than expected in the third quarter of 2021. Management had originally expected total expenses in 2022 to be between 91 $97 billion and $97 billion. However, they now forecast total 2022 spending to be between $85 billion and $87 billion. That said, they ultimately conclude that “while this announcement does nothing to alleviate concerns about competition, loss of signal and the perception of excessive investment in the Metaverse – this is the first sign that the CEO h as shown by his willingness to acquiesce to the desire of shareholders es to invest a little more wisely given the various headwinds the company faces. uncertainty and the general slowdown in digital advertising, as these cuts should help better align Meta’s cost structure with its current growth trajectory, attract current investor sentiment, and improve overall operational efficiency.” Ultimately, the news is clearly positive and should lead to an upward revision to estimates, however, it will take more before we can see any sustained upward movement, so we believe Wednesday’s update serves to solidify the stock’s bottom and induce investors to become more constructive on the stock, however, we don’t believe this warrants additional exposure to the name, as there are better areas to grow the money where the fundamentals are more in line with the macro landscape.We stand by our downgrade of Meta stocks last month to a 2 e rating. t the reduction of our target price to $150 per share instead of $235. Finally, we would like to acknowledge that Meta’s announcement is consistent with what we have seen across the industry and serves to help the Federal Reserve achieve its goal of slowing the economy to reduce inflation. (On that front, Thursday’s release of the government’s consumer price index will be of utmost importance.) Here’s a quick look at what our other Club companies are doing to control costs. Salesforce (CRM) confirmed it laid off fewer than 1,000 people on Monday. Reports had speculated that the reductions would be more than double. Qualcomm (QCOM) CEO Cristiano Amon told us last week that the chipmaker was prioritizing cost-cutting, including a hiring freeze. Amazon (AMZN) this week extended its hiring freeze to its entire workforce. Now that Covid is less of an issue, Amazon has tried to scale its operations, which were consolidated at the start of the pandemic to meet overwhelming demand. Alphabet (GOOGL), in its forecast last month, said its fourth-quarter headcount additions are expected to slow to less than half of the 12,765 hired in the third quarter. Management’s actions to slow the pace of hiring should be more apparent next year. (Jim Cramer’s Charitable Trust is long META, CRM, AMZN, QCOM, and GOOGL. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim does a shop. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. 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Mark Zuckerberg, CEO of Meta Platforms Inc., speaks during the Meta Connect virtual event in New York, U.S., Tuesday, October 11, 2022.
Michael Nagle | Bloomberg | Getty Images
Club holding’s announcement on Wednesday Metaplatforms (META) that it employs about 13% of its workforce, or more than 11,000 employees, is a sign to us that CEO Mark Zuckerberg, in the words of Jim Cramer, “has religion” when it comes to to try to get a handle on the company’s uncontrollable costs. While we don’t welcome people losing their jobs, we would like to point out that the severance packages seem generous, and we hope they can mitigate some of the blow for those unfortunate to be included in these reductions. of staff.
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