Can Meta’s Cost-Cutting Measures Save Its Sinking Stock?

• Meta’s massive job cuts mark a major turning point for the social media giant after a tumultuous year
• The biggest uncertainty hurting Meta's stock is Zuckerberg's pivot to the metaverse
• This year's sharp decline has made Meta’s fundamentals more attractive than many value stocks

Meta Platforms (NASDAQ:META) is in deep restructuring mode. Earlier today, the parent of Facebook and Instagram announced plans to cut more than 11,000 jobs, or 13% of its workforce, in the first major drive of layoffs in the company’s 18-year history.

While reductions will happen across the company, CEO Mark Zuckerberg said the company’s recruiting and business teams would be disproportionately affected. Meta will also reduce its real estate footprint and review its infrastructure spending, with more cost-cutting announcements expected in the coming months.

Job cuts of this scale mark a significant turning point for the social media giant, which, until last year, was on a solid growth path, crushing earnings expectations and producing margins that Wall Street executives envied.

But a year later, it looks more like a survival story. The Menlo Park, California-based company has lost about $800 billion in market cap as its stock plunged about 70% since its September peak, making Meta the worst-performing large-cap technology company.

META Weekly Chart

Some factors that helped bring the social media giant to its knees aren’t unique to the company. For example, the digital ad market is shrinking as companies take measures to hedge recession risks. In addition, it has become extremely difficult for social media companies to target users with the right ads after Apple (NASDAQ:AAPL) changed its privacy settings by allowing users to stop ad targeting.

Fierce Competition

Furthermore, increasing competition from the Chinese-owned TikTok is eroding Facebook and Instagram appeal among youngsters, creating an existential threat that requires massive investments and the right set of products to succeed.

However, the most significant setback is certainly Zuckerberg’s pivot to the metaverse, a virtual-reality-fueled world that he thinks will host the future of work and communication. Not only are investors increasingly doubtful of the enterprise’s success, but they are also questioning its timing.

Zuckerberg committed billions of dollars at a time when Facebook’s cash machine was slowing, and the competition was heating up. In today’s announcement, Zuckerberg appears to have recognized this mistake. He told employees in a letter:

“At the start of COVID, the world rapidly moved online, and the surge of e-commerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected.”

The effort is costing Meta billions, and the company expects to lose more money on the metaverse bet next year. According to a recent report by the Wall Street Journal, the company’s transition to the metaverse is grappling with glitchy technology, uninterested users, and a lack of clarity about what it will take to succeed.

All the negative factors are very much reflected in Meta’s stock price today. The sharp decline in its stock value has made Meta’s valuation cheaper than many value stocks when considering price relative to profits. The Menlo Park, California-based company now sells for nine times estimated earnings. By comparison, the average valuation in the NASDAQ 100 Index is around 23 times earnings.

However, for some analysts, as evident from Investing.com’s poll, the current setup is a signal to dive in and scoop up Meta shares.

Meta Platforms Consensus Estimates

Source: Investing.com

The bullish case is that the communications services behemoth—which not only owns Facebook, the largest social media platform in the world but is also the parent company of Instagram and WhatsApp, among other properties—has produced massive profits for many years and, thus, things could change quickly should the macroeconomic situations improve.

With that, investors have to trust that Zuckerberg’s pivot to the metaverse is worth letting other growth opportunities go. That’s perhaps the most difficult part of the puzzle that Meta has become these days.

Bottom Line

Meta stock could reverse its course in the short run following the company’s cost-cutting measures. But I don’t see that rally going too far. The company’s $69 billion Capex spendings in the next two years remain a major drag on the stock’s powerful rebound from these low levels. Meta is a stock for high-risk-takers who want to gamble on the next big thing that could take years to pay off.

Disclosure: At the time of writing, the author is long on Apple stock. The views expressed in this article are solely the author’s opinion and should not be taken as investment advice.