Meta hiring discipline will pay off in cash flow - Morgan Stanley
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Reports that Facebook parent Meta Platforms (NASDAQ:FB) is cutting back on headcount costs gives some reinforcement to earnings-call comments that the company would be exercising some discipline, Morgan Stanley analyst Brian Nowak said, Monday, adding that portends some potentially solid free cash flow improvements.
Nowak said media reports indicate that Meta's (FB) plans include reducing or freezing hiring of engineers, and mid- to senior-level positions.
"Taking this into account," Nowak said, "We ask ourselves: How much could a hiring freeze help to 'protect EBIT and free cash flow'?" Nowak added that what he called an "uncertain macro period" for Meta (FB) also features a transition toward, for now at least, lower monetizing of Facebook Reels.
Nowak's existing base case model already assumes the company included conservatism in its operating expense guidance: MS expects Meta's (FB) GAAP operating expenses in 2022 to reach $86 billion, assuming the company adds about 11,000 employees. Nowak said Meta (FB) added about 5,800 workers in the first quarter of this year, and that operating expenses per head should rise 5% from a year ago.
All else being equal, the extent to which cuts are already happening could mean Meta (FB) adding 4% to 16% to its 2022 free cash flow per share, Nowak said. "We know this is a bull case," Nowak said, and that Meta could end up trading at around a 7% free cash flow yield, as compared to Alphabet (GOOG) trading around 5% in free cash flow yield.
Even without the cuts, Nowak has an overweight rating on Meta's (FB) shares, and he believes the stock has a 65% upside potential. Nowak said he is "even more encouraged by these changes" as the combination of revenue acceleration in the second half of 2022--driven in part by modest incremental contribution from Reels monetization--and cost discipline, should lead to the company seeing significant free cash flow generation.
During its earnings call in late April, Meta (FB) said in response to current business growth that it would be focused on slowing down investments.