Meta Platforms Inc.’s first major job cuts won’t be nearly enough to get the company back to being as profitable as it was just two years ago, according to analysts.
Meta laid off 11,000 workers on Wednesday. Chief Executive Officer Mark Zuckerberg said he bore responsibility for growing the company too quickly, on a failed bet that the increase in social media activity and online shopping during the pandemic would continue. “I got this wrong,” he said.
But at the end of a difficult day for thousands of employees, the company -- parent to social media giants Facebook, Instagram and WhatsApp -- is still facing many of the same problems it did a week ago, now with 13% fewer people.
Meta is under intense scrutiny after posting its first two quarters of revenue declines compared to the same periods last year. At the same time, spending forecasts for next year to keep its social media apps relevant and pursue its long-term bet on virtual reality ballooned, surprising analysts and driving the stock down to levels not seen in seven years.
“Although this is an encouraging start of being disciplined on spending and investments, we believe the company has more room to go,” James Lee, managing director at Mizuho Securities, wrote in a note to clients after the news of the layoffs.
Meta’s profitability has fallen to a two-year low. Its operating margin has been sliding for several quarters to 20.4% at the end of September -- half of what it was at the end of 2020. While lowering the business’s headcount will reduce spending, it may have to be one piece of a broader turnaround story, Lee said.
The job cuts will save the company $1.5 billion, Lee said, which is equal to just 1 point of operating margin. Compare that to the $13 billion the Reality Labs division is expected to spend this year, dragging down operating margin 11 points, he said. Even with the cuts, Meta continues to expect losses in the Reality Labs division, which houses metaverse investments, will grow “significantly” year-over-year in 2023, the company said in a filing Wednesday.
Zuckerberg has directed Meta to spending heavily on the far-afield future he renamed the business after, a VR environment called the metaverse. It’s a vision he defended in a recent earnings call with investors, even as the multibillion-dollar spending has prompted a flood of skepticism.
Meta “created self-inflicted wounds when it began to invest heavily in the promise of the metaverse,” said Debra Williamson, principal analyst at Insider Intelligence. “It sank billions of dollars – and will sink billions more – into building for this future vision, and in the process it took its eye off of what was happening with its platforms today.”
Advertisers have been spending less on Meta’s platforms, rattled by economic uncertainty and a change to Apple Inc.’s privacy rules that made Meta’s ads less effective on iPhones. In the fourth quarter, which includes the important holiday spending period, analysts expect Meta revenue to decline from the same time a year ago yet again. “That’s historic,” Williamson said.
Meanwhile, Meta has been directing more users to short-form videos on Instagram called Reels, where it doesn’t make money as easily. That change in user attention is costing potential revenue in the short term. Users also increasingly expect content suggestions based on their interests and that requires complex artificial intelligence technology the company has to invest in, Zuckerberg has said.
On Wednesday, Zuckerberg reaffirmed that the company would narrow its focus to “priority growth areas -- like our AI discovery engine, our ads business platforms, and our long-term vision for the metaverse.” Improvements in those areas won’t necessarily bring expenses in line with revenue growth, he said in his message to employees.
Keeping users entertained by Meta’s social apps is a valid priority, Williamson said. “But Mark has also realized that the advertising is literally what pays the bills, and they do need to focus on that more than they have.”
Meta’s stock rose 5.2% Wednesday, a small vote of confidence after shares had tumbled 70% this year. Now the company will need to prove it can do more with less.
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