Meta stock surges as it cuts costs and launches new buyback

Meta stock pops after Q4 earnings

Meta shares are up 19% following its latest update, which saw the social media giant beat sales forecasts in the latest quarter, launch a new $40 billion share buyback, and vow to keep cutting costs to become a leaner and more efficient business in 2023.

If those premarket gains are sustained, the stock is on course to open at its highest level since in almost eight months and add almost $80 billion in value overnight.

Let’s dive into the results.

Meta sales and user growth impresses

Meta said revenue in the final quarter of 2022 came in at $32.2 billion. Although that was down 4% from the year before as the slowdown in the digital advertising market continues to bite, this was above the $31.6 billion forecast by Wall Street.

Meanwhile, the company revealed that Facebook reached a major milestone after ending the year with 2.0 billion daily active users. That was up 4% from last year and welcomed by markets considering they had expected user numbers to decline.

It now has 3.7 billion across its entire family of apps when its other platforms like Instagram and WhatsApp are included. That is at an all-time high and means Meta’s reach extends to around 46% of the world population.

Meta earnings miss the mark on restructuring costs

Meta’s earnings did not perform as well, with EPS plunging 52% from last year in the fourth quarter to $1.76. That was nowhere near the $2.25 pencilled-in by Wall Street.

The miss was down to $4.2 billion of restructuring costs after Meta laid off 11,000 workers, representing around 13% of its workforce, and cancelled an array of data centre projects. If these charges were stripped out, then quarterly EPS would have easily beaten expectations and come in around $3.00.

Meta outlook meets expectations

Meta said it expects to deliver revenue of between $26.00 billion to $28.50 billion in the first quarter of 2023. That was roughly in-line with the $27.3 billion forecast by Wall Street.

Depending on where that lands, first quarter revenue will be down 6.8% or up 2.2% compared to the year before. That outlook was rosier than what we saw from smaller rival Snap earlier this week, which reported its slowest revenue growth on record in the fourth quarter and warned there was more pain to come by warning revenue would be down 2% to 10% this quarter.

Meta launches $40 billion share buyback

Meta shareholders are also cheering its decision to launch a new $40 billion share buyback, which will be in addition to the $10.9 billion left to repurchase shares under its existing programme. That will not only allow Meta to capitalise on its lowly valuation following the heavy selloff in 2022 but also provide support to both its EPS and share price going forward.

Meta said 2023 will be ‘Year of Efficiency’

Costs continue to rise and weigh on the bottom-line, but Meta said getting a grip on costs and becoming more efficient will be a top priority in 2023.

The company said it expects annual costs and expenses to amount to $89 billion to $95 billion in 2023, having been slashed from its original budget of $94 billion to $100 billion. Those savings have been made through job cuts and a slowdown in hiring, as well as a reduction in cost of revenue. It did warn that it will book another $1 billion of restructuring charges this year as it adjusts its workspace to reflect the recent layoffs and more charges may follow depending on whether it takes further action.

That has shown investors that Meta is getting a grip on costs and protecting profitability in these tougher times. This has installed confidence that it can weather the storm and bounce back in better condition when the recovery eventually comes.

It also lowered its capital expenditure budget to $30 billion to $33 billion from its previous range of $34 billion to $37 billion. These savings have been found from reducing the number of new data centres it plans to construct this year as it shifts to a new architecture that is more cost efficient and can support a broader workload.

That is significant because this new architecture will improve the economics of the business and help it utilise more artificial intelligence. Meta has been actively trying to use AI and has been encouraged by its early projects, which is prompting it to up investment. For example, AI is playing a bigger role in deciding what people see on their feeds and that has led to a 20% rise in conversions for advertisers over the past year, while the cost of acquiring customers has also dropped to boost their returns.

‘We closed last year with some difficult layoffs and restructuring some teams. When we did this, I said clearly that this was the beginning of our focus on efficiency and not the end. Since then, we've taken some additional steps like working with our infrastructure team on how to deliver our roadmap while spending less on capex,’ said CEO Mark Zuckerberg.

‘Next, we're working on flattening our org structure and removing some layers of middle management to make decisions faster, as well as deploying AI tools to help our engineers be more productive. As part of this, we’re going to be more proactive about cutting projects that aren't performing or may no longer be as crucial, but my main focus is on increasing the efficiency of how we execute our top priorities,’ he added.

Those comments suggest we could see more layoffs this year, especially as Meta’s workforce will still be around 75% larger than it was before the pandemic hit even after those 11,000 layoffs feed through in the first quarter of 2023.

One area where Meta didn’t appear to show any appetite for pulling back on investment is the metaverse. Meta is spending billions on a project that is not expected to yield any form of return for years to come, and that is during one of the most challenging times for its core social media and advertising business. The Reality Labs unit that homes its metaverse projects reported a record quarterly loss of $4.3 billion in the last three months of 2022 – and losses are set to peak in 2023.

Is Meta stock undervalued?

Meta has regained the confidence of the markets this morning and allowed its share price to recapture almost all the value lost since markets punished the stock for its last set of quarterly results.

The fall in sales is subsiding and the outlook is improving, with revenue expected to return to growth in the second quarter of 2023 and accelerate toward double-digit pace by the end of the year. Earnings should also start growing again this year as it comes up against easier comparatives and savings feed through. Meanwhile, Meta is hitting all the buzzwords that are stirring up excitement in the market, from artificial intelligence to the metaverse. Its apps continue to grow and have unrivalled reach and its messaging services should start to contribute more as Meta works on monetising WhatsApp.

Still, Meta shares are still way below where they sat before the start of the pandemic even though annual sales were 73% higher in 2022 than they were in 2019 and its reach in terms of user numbers has extended. Plus, while earnings have fallen from the peak we saw in 2021, they remain broadly in-line with what it was delivering three years ago.

With this in mind, Meta’s valuation is still trailing its historic average even after the pop seen this morning and it continues to trade at a discount to its Big Tech peers.

Meanwhile, a string of brokers raised their price targets on Meta this morning as they welcomed the update, including Jefferies to $225 from $175, Evercore ISI to $275 from $170, Goldman Sachs to $215 from $164, Cowen & Co to $175 from $135, Credit Suisse to $220 from $180 and Atlantic Equities to $200 from $120. Meanwhile, Piper Sandler upgraded the stock to Overweight from Neutral and upped its target to $215 from $136.

Where next for Meta stock?

Meta shares are up almost 19% in extended hours trade today, putting it on course to open at around $182. The jump will see the stock open at its highest level since July 2022.

The stock is on the cusp of recapturing $183, marking the ceiling we saw throughout the third quarter of last year. From here, it can bring $202 into the crosshairs, which acted as a ceiling throughout June and May. A larger jump toward $222 then comes into play, which is a significant level considering this is where it sat before the pandemic derailed financial markets in 2020.

However, the stock may find it more difficult to climb higher following the jump today. The RSI is already in overbought territory and will be thrusted further by today’s move.

Take advantage of extended hours trading

Meta released earnings after markets closed and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade Meta and other tech stocks using our extended hours offering.

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