Meta Stock: Earnings Potential By 2023

Meta Stock

Meta Stock (NASDAQ:META)

The term “responsibility” refers to the act of determining whether or not a person is responsible for his or her own actions. The latest round of layoffs comes after Meta Platforms (NASDAQ:META) slashed about 11,000 positions in Q4 ’22 as a sustained slowdown in the advertising business and early investments in the metaverse ate into the company’s profitability. Given that the social media company’s stock is currently relatively inexpensive based on profits, I believe a combination of ad market recovery, aggressive stock buybacks, and a restructure of Meta Platforms’ cost structure might be powerful catalysts to propel META into a new upswing in FY 2023!

Meta Platforms has announced a new wave of layoffs in order to increase profitability.

In its most recent wave of layoffs, Meta Platforms said that it will lay off an additional 10,000 people, reduce the number of roles that have previously been posted, and terminate lower-priority projects. The job layoffs come very shortly after the corporation eliminated 11 thousand people from its payrolls in the fourth quarter.

Given that the typical income of a Meta Platforms employee is rough ~$150 thousand, according to Comparably, the yearly cost savings potential associated with the total number of payroll deductions revealed since November might be around $3.0-3.1B, without considering any short-term severance payments. Meta Platforms demonstrates its understanding of the need to increase profitability in a challenging ad environment by aggressively decreasing its operating costs.

The job layoffs are projected to result in decreased operational expenditures and boost Meta Platforms’ profitability going forward. In FY 2022, Meta Platforms reported $87.7B in operational expenses, most of which were to Research & Development. The social media company projected full-year operating expenses of $89-95B in its recent quarterly report, revealing a downgrade from its original FY 2023 cost prediction of $94-100B mostly because of reduced planned payroll expenses. Given the fresh round of layoffs announced last week, I expect we will see another modification of operational costs in Q1’23, with a revised prediction of $90-92B likely, meaning a $2B profit increase. A better-than-expected OpEx outlook could be a trigger for Meta Platforms’ shares to resume their upward trend.

Meta Platforms have suffered a reduction in net income and free cash flow as a result of a sluggish ad market and an increase in investments in the metaverse, which has investors concerned. In the fiscal year 2022, Meta Platforms earned $23.2 billion in net profits, 41% less than the previous year. Yet, as we will see below, Meta Platforms’ top-line impact has been quite limited, indicating that the social media company’s main difficulty is the generating of net revenue. In the last two years, the social media firm has increased its metaverse spending, particularly in the fiscal year 2022. Here I discussed the metaverse possibility, which is estimated to be worth $800B or $1T.

Meta Platforms saw a very low year-over-year revenue reduction in FY 2022. The social media business collected $116.6B in revenues, representing only a 1% reduction on a year-over-year basis. The revenue decline, or lack of growth, was caused by headwinds such as Apple’s iOS update in FY 2021, which hampered advertisers’ ability to track consumer online transactions, as well as high inflation and the mounting threat of TikTok, which has steadily gained market share in the attention economy. Nevertheless, the impact of a declining ad market on Meta Platforms’ top line has been modest in the fiscal year 2022.

Notwithstanding fears about an ad industry downturn in FY 2022, I believe the impact on Meta Platforms’ advertising revenues has been very minor thus far. In the fiscal year 2022, Meta Platforms recognized an average of $28.4 billion in advertising revenues per quarter, compared to $28.7 billion in the fiscal year 2021.

The near-term picture for the ad business is not promising, as numerous factors impact expenditure (such as inflation, rising rates, and decreasing economic development), implying that Meta Platforms will have ongoing revenue growth issues in the foreseeable future. The digital advertising business downturn has impacted numerous technological companies, notably Google and Snap (NASDAQ:SNAP), resulting in a wave of layoffs across the sector. Yet, I feel the poor prospects for growth have already been fully factored into Meta Platforms’ valuation.

Meta Stock Valuation

Meta stock has risen significantly after the business announced fourth-quarter earnings, which included an aggressive $40 billion stock purchase. Despite a 63% price return year-to-date, shares of META are still cheap, selling at a price-to earnings-ratio (forward) of 17.0 X. Meta Platforms remains the market’s cheapest FAANG stock, even cheaper than Alphabet (NASDAQ:GOOG), which is also unjustly undervalued and provides investors with significant free cash flow and repurchase value.

Meta Platforms’ shares are presently priced slightly above its 1-year average P/E ratio… but I feel the company is still valued.

The estimated trend is also improving, as earnings per share expectations have begun to rise. The market is pricing in a rebound in the advertising business in FY 2023/2024, with Meta Platforms expected to achieve 11.5% EPS growth in FY 2023 and a 24.5% increase in FY 2024. The current estimates offer some upside as well because most of them have not yet been adjusted for the last wave of layoffs and improved OpEx picture.

Hazards of Meta

The most significant commercial risk for Meta Platforms is that the social media company’s advertising top-line growth may decrease even further. The market expects a recovery in Meta Platforms’ earnings picture, but a prolonged ad industry downturn would be a huge negative for the company. What would change my perspective about Meta Platforms is if the company suffered a sharp fall in its key operating indicators such as daily active users and free cash flow. In Q4 ’22, Meta Platforms had a free cash flow margin of 16%, and a significant drop-off, maybe due to increasing metaverse investments, would be unfavorable for Meta Platforms and Meta stock prospects.

Last Thoughts

A new round of layoffs has the potential to increase Meta Platforms’ profitability in FY 2023, which has been harmed by a broad-based advertising downturn caused by high inflation and increasing competition, particularly in the fast-developing market of short-term video apps. Considering Meta Platforms’ current focus on dramatically decreasing operating costs, I expect Meta Platforms to reduce its operating expenditure prediction down to a range of $90-92B when it publishes Q1’23 earnings. EPS forecasts have begun to climb, indicating the possibility of a surprise. 

Featured Image: Unsplash @ solomin_d

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.