Meta needs more than job cuts to show fortunes have reversed - Benchmark
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Meta Platforms (NASDAQ:META) has been the beneficiary of some rolling Wall Street bullishness as its stock mounts a four-month rally, but Benchmark is set to throw some cold water on the positivity around the "year of efficiency."
The stock bottomed out at a 52-week low of $88.09 on Nov. 4, in the aftermath of a rough third-quarter earnings report. Since then, it's reclaimed a lot of lost ground, up 139%.
That's come alongside a number of bullish reports from analysts who called the bottom on the company's ad recession and looked for ongoing benefits from an efficiency push that will result in more than 20,000 jobs cut.
That rally is "over," Benchmark's Mark Zgutowicz says, and "it's time to lighten the load on a misperceived safe play in a troubled macro."
The job cuts have a clear enough impact on the cost side of profit/loss statements, he suggested, but consensus revenue expectations are ignoring the magnitude of what the cuts imply.
"Specifically, we expect '23/'24 revenue will fall -7%/-14% short of consensus and the same shortfall on operating income despite our conservative cost assumptions," he says noting a high correlation of revenue to headcount growth.
In the past five years, Meta's revenue growth has exceeded average headcount growth in just one -- 2021, a COVID benefit year, he noted. And while Benchmark's 2023 revenue-per-employee expectations imply a return to growth after a six-year downtrend, "consensus revenue implies a much more aggressive revenue reversion trajectory" and is "simply unrealistic."
Ad spending will still weaken this year as a negative lag effect from rate hike cycles hits consumer spending, he said. And while that will impede Meta's growth, "its peak digital share weighs perhaps more on managementâs longer-term contemplation of cost efficiencies."
The firm has a Hold rating. Meta's expected to report earnings in the last week of April.