Meta Stock Soars on Efficiency Drive. Growth Is the Next Challenge.

2 Feb 2023

Barron's

Meta Stock Soars on Efficiency Drive Growth Is the Next Challenge

“We can’t just treat everything like it’s hyper growth,” Meta CEO Mark Zuckerberg told analysts.

Meta’s fourth-quarter revenue dropped 4% from the year before to $32.2 billion. Dreamstime

Meta Platforms stock was surging early Thursday as investors and analysts took heart from its plans to reduce spending and return more money to shareholders.

In Thursday’s premarket trading, share of Meta (ticker: META) were up 20%.

The company, in its fourth-quarter report on Wednesday, lowered its capital expenditure outlook for this year by about $4 billion and laid out plans for a $40 billion stock buyback.

CEO Mark Zuckerberg told analysts on an earnings call that the Facebook and Instagram owner was led to change its approach after recording its first ever annual fall in revenue in 2022.

“I think [that] just forced us to basically take a step back and say, OK, we can’t just treat everything like it’s hyper growth,” Zuckerberg said.

Zuckerberg hinted at potential job cuts when he told analysts the company would remove some layers of middle management and be quicker to drop projects that weren’t deemed crucial. Last year, Meta announced it would layoff about 11,000 employees or 13% of its workforce.

Wednesday’s results and guidance bolstered some bulls. Analysts at Mizuho Securities raised their target price to $210 from $170, with a Buy rating.

“With limited revenue downside, more room for cost efficiency, and increasing scrutiny of TikTok, we continue to like the FY23 setup,” Mizuho analysts, led by James Lee, wrote in a research note.

Guggenheim analysts, led by Michael Morris, raised their target price to $210 from $130, with a Buy rating.

“Our significant target multiple expansion reflects […] our greater confidence that the company’s more disciplined investment approach will yield more sustainable cash flow growth than the prior plan,” Guggenheim’s analysts wrote.

While the initial market focus was on Meta’s cost cutting and stock buyback, analysts at UBS led by Lloyd Walmsley said there were other signs of improvement, as sales beat expectations on stronger advertising revenue.

“These results show significant improvement around key overhangs and […] shares are under-owned by long-term investors in our view,” the UBS analysts wrote. They reiterated their Buy rating and $158 target price on the stock.

The UBS analysts said Meta now has a path to double-digit annual revenue growth by the end of 2023, compared with a 4% fall in sales for the final quarter of 2022.

However, others have doubts about whether Zuckerberg’s refashioned Meta can return to strong growth while sharply reducing its workforce.

“Mr. Zuckerberg’s commentary suggests a meaningful change inMeta’s culture, with fewer layers of management. While we acknowledge the potential for faster decision times and reduced opex [operating expenses], we also believe swift changes can risk disrupting morale,” analysts at KeyBanc, led by Justin Patterson, wrote.

KeyBanc’s analysts said stricter regulation and shifting advertising budgets could limit Meta’s growth. KeyBanc has a Sector Weight rating on Meta.

Write to Adam Clark at adam.clark@barrons.com