Special | Joshua Warner
The tech giant "wave of layoffs" has just given way from the headlines, and Meta, the parent company of social media platforms Facebook and Instagram, has broken the big news.
Meta announced plans to lay off another 10,000 jobs in the coming weeks and months. And stop the 5,000 job openings currently released and slow down the pace of recruitment. It's the latest step taken after Meta CEO Mark Zuckerberg described 2023 as a "year of benefits," when Meta released its annual results vowing to continue cutting costs in response to slowing growth from a weak advertising market.
Those responsible for recruiting new employees will be affected first, with technical employees facing a choice "late April" and then business unit employees "late May." This suggests the restructuring will take months to complete, with Meta warning that "a small number of cases" may not be resolved until the end of 2023. How will this affect Meta's share price, which has rebounded nearly seventy percent from last October?
After laying off 20,000 employees
Meta wants to be a leaner, more technical company
This is the second round of layoffs initiated by Meta, which announced 11,000 layoffs last November. Even after announcing another 10,000 layoffs today, it is still struggling to continue cutting costs.
Meta was one of the companies that went on a hiring spree after the pandemic and during the recovery of the workforce. As you can see in the chart below, Meta's headcount more than doubled from the beginning of the pandemic to the end of 2022. Even with 21,000 job cuts, Meta still has about 46% more employees than it did before the pandemic.
Still, Meta said it would "lift the hiring and transfer freeze" once the layoffs were complete and the workforce could start growing again. Investors shouldn't expect an increase in hiring, though, with Meta vowing to be a "leaner, more technical company" and confirming it will hire new employees at a much slower pace than in recent years.
Meta says it plans to flatten the structure and cut unnecessary management to speed up processing and improve workflows across the business. It is also continuing to pull resources from low-priority projects and reallocate them to other operations.
There will be no significant improvement in the business environment
The dilemma can last for years
The hopes that will drive Meta's share price higher may prove to be premature. According to a regulatory announcement on Tuesday, Meta only cut its spending range for the full year of 2023 by 3%, even with the recent large-scale layoffs. Zuckerberg himself has admitted that he does not expect a major improvement in the business environment.
Meta has previously warned that the situation will remain grim throughout 2023, and Zuckerberg said in an internal notice to employees: "I think we should prepare for the possibility that this new economic reality will last for many years." ”
Zuckerberg said: "For most of our past years, we have seen rapid revenue growth and resources invested in many new products. But last year sounded the alarm. The world economy has changed, competitive pressures are increasing, and our growth has slowed significantly. ”
With growth struggling for the foreseeable future, the actions Meta can take are proof that it is controlling costs and protecting profitability through tougher times. This helps build confidence that it can weather the storm and bounce back in better shape when recovery finally arrives.
He added: "Given this outlook, we need to operate more efficiently than we did before the layoffs to ensure everything runs smoothly." ”
Refusal to cut investment in the metaverse
And invest heavily in AI
Meta's investment in the metaverse is undoubtedly one of the most money-burning parts. But Meta also found it difficult to convince the market that its investment in the metaverse would pay off.
For example, the virtual reality lab responsible for the metaverse spent $13 billion in 2022 and will spend billions more in 2023. Some analysts have called for Meta to cut or even abandon the expensive metaverse to focus on its core advertising business, which is going through one of its toughest times ever.
Cutting back on metaverse investments is the easiest way to protect profits without impacting the business that has driven Meta to this day — even though doing so could lose new opportunities that it sees as determining its future dominance.
But Meta firmly believes that the metaverse is still a dream now, even if it will face challenges in the near future. Zuckerberg gave no hint of abandoning that vision, noting Tuesday that the concept "remains central to defining the future of social connectivity."
"Faced with the new reality, most companies will scale back their long-term vision and investments. But we're willing to take risks and make decisions that no other company can match. That's why we've developed a financial plan that will allow us to invest significantly in the future while generating sustainable performance as long as we manage each team more effectively. The changes we are making will allow us to realize this financial plan. ”
Notably, Meta said its biggest investment right now is not the metaverse, but artificial intelligence, adding that artificial intelligence is being "applied to every one of our products."
Meta said, "We have the infrastructure to achieve our goals on an unprecedented scale, and I think the experience it will bring will be amazing." Our leading businesses in building the metaverse and shaping next-generation computing platforms will remain central to defining the future of social. Our apps continue to grow and continue to connect nearly half of the world's population in new ways.
It is difficult for stock prices to gain upward momentum
A fall to February lows is still possible
Driven by the news of layoffs, Meta shares rose sharply on Tuesday Eastern time.
It is worth mentioning that even if there is zero revenue growth this year, in the case of layoffs, the company's revenue per employee will still be about 16% higher than the average of the past five years, which makes investors rejoice. Meta's shares closed up 7.25 percent on Tuesday, extending the company's cumulative gain of 78 percent since announcing its first layoffs in early November, which is almost eight times the Nasdaq's gain over the same period.
But can the rally be sustained? According to FactSet, Meta's stock price is now trading at an expected price-to-earnings ratio of nearly 10 percent higher than Google's parent company Alphabet Inc. (GOOG), and for most of the past year, Meta's stock has had a lower expected price-to-earnings ratio than its larger rival.
The near-term upside target for Meta shares is to break the February closing high of $191.62, which the stock tested in early trading on Tuesday. From there, it could go back above $202 and then look at a higher target of $223, which was the high of last May and the high before the pandemic hit financial markets hard in early 2020.
But the 58 brokers covering the stock see limited upside potential after the 2023 rally, with an average price target of $209 currently.
In addition, the RSI also tested the overbought zone today, suggesting that it may be more difficult to gain more upward momentum. A pullback to the February low of $168 is still possible. Below here, the Q3 2022 low of $155 should provide some support.
(The author is a senior analyst at GAIN Group.) This article was published in Red Weekly on March 18, and the views expressed in this article are only those of the author and do not represent the position of Red Weekly. The mention of individual stocks is only an example analysis, and does not make trading recommendations. ）