Cramer: Meta layoffs show Mark Zuckerberg 'got religion' on costs, but he must cut more

Published Wed, Nov 9 20221:24 PM EST

The announcement Wednesday from Club holding Meta Platforms (META) that it's laying of about 13% of its workforce, or more than 11,000, employees, is a sign to us that CEO Mark Zuckerberg, in the words of Jim Cramer, "got religion" when it comes to trying to get a handle on the company's out of control costs. While we take no joy in people losing their jobs, we would like to point out that the severance packages appear to be generous, and we hope they can blunt some of the blow for those unfortunate to be included in these staff reductions. Meta jumped roughly 8.5% in Wednesday's trading on the job cut news. But there's still a lot of ground to make up following its 24.5% drop post-earnings on Oct. 27. Even with Wednesday's gain, Meta's stock was still down nearly 69% year to date and one of the worst 2022 performances of any S & P 500 company. As painful as job cuts are, especially in this economic climate, we think the move was necessary after the Facebook-parent delivered dismal third-quarter results and a weak outlook last month. Management at the time guided for a mid-teen percentage point increase in expenses, in direct contrast to investors' desire to see expenses come down and expense growth fall more in-line with revenue projections. Jim had been calling on Meta and other tech companies for months to recognize the severity of the global macro headwinds and to reduce their costs. So we're pleased to see management finally show signs of waking up to the realities of the operating environment in which we find ourselves. In a letter to employees about the layoffs, Zuckerberg wrote, "We are also taking a number of additional steps to become a leaner and more efficient company by cutting discretionary spending and extending our hiring freeze through Q1." In a Securities and Exchange Commission filing about the layoffs, Meta quantified its efficiency efforts, saying the team now expects total 2023 expenses to be in the range of $94 billion to $100 billion, down from the $96 billion to $101 billion guided for with the third quarter earnings release. The revised guidance reflects management's "plan to add fewer employees in 2023 than we previously expected as we are significantly slowing our hiring trajectory through the beginning of 2023." Contributing to the cost outlook reduction, management now anticipates capital expenditures (capex) to be in the range of $34 billion to $37 billion, a reduction at the high end from the $34 billion to $39 billion range previously forecast. Notably, however, management's expectation for Reality Labs losses to "grow significantly year-over-year" remain unchanged. Reality Labs is the company's virtual reality and metaverse segment. As a knock-on effect, this capex reduction from Meta may be causing some of the pressure we're seeing in semiconductor stocks, an area that caught a bid following Meta's initial expense guide. However, as we noted during Wednesday's "Morning Meeting," we are not looking to reduce any of our semiconductor positions based on this news. Members can review the dynamics of cloud and data center spending and semiconductor company sales in our guide to the chip industry and how it works. While the Meta layoffs are a start, we believe more may be required seeing as in the past year alone, as of the third quarter, the company added about 19,000 employees to the company's headcount. Members will recall that prior to the Q3 release, Brad Gerstner of Altimeter Capital Management, a long-term Meta shareholder called for several key changes that he believed would serve to double free cash flow to $40 billion per year and "focus the company's teams and investments." In an open letter on Oct. 24 to management, Gerstner called a number of actions. At least a 20% staff reduction; effectively releasing all employees hired over the last year. Reduction of annual capex by at least $5 billion; instead management guided for a $2 billion 2023 capex reduction at the high-end of its previous range, as mentioned this in more detail earlier. Limit metaverse-oriented investments "to no more than $5 billion per year." Looking at these steps, which were very much well received by Wall Street, it's safe to say that while Wednesday's news is a start — it's only just that, a start. Achieving step one would require an additional roughly 6,000 layoffs. As for other expenses, while the reduction in the high-end of capex is welcome, we are clearly nowhere near the $25 billion investors would like to see and clearly management has no intention of slowing the pace of investment into the Reality Labs segment. Here's a look at some Wall Street reaction to the news. Analysts at JPMorgan said, "While we had hoped the 2023 expense outlook would come down more, the workforce reduction overall is likely bigger than most people had expected and shows management is operating with increased discipline, especially after a tough almost 2 week period since reporting 3Q earnings." In their view, the move could "theoretically remove ~$8B of costs on an annualized basis." Analysts at UBS said, "We think Meta cost reductions — across opex [operating expenditures] and capex — signals that the company hears investors, and we think the shares can move higher." By their estimate, the $2 billion reduction in operating expenses could add roughly 60 cents to 2023 earnings per share estimates — or even more should expenses ultimately come in on the low end of guidance. Over at RBC, the analysts see a good chance that management will walk down their expense guidance throughout the year, noting that in 2022, realized operating expenses are likely to be about to be about 10% lower than what was guided for in the third quarter of 2021. Management initially guided for total expenses in 2022 to be in the range of $91 billion to $97 billion. However, now they anticipate 2022 total expenses to come in the range of $85 billion to $87 billion. That said, they ultimately conclude that "while this announcement does nothing to alleviate the concerns around competition, signal loss and the perception of excessive Metaverse investment — it is the first sign the CEO has shown of being willing to acquiesce to shareholders' desire for investing a bit more judiciously given the various headwinds the business faces." At Canaccord Genuity, the analysts said, "We view this announcement as incrementally positive for the stock, particularly given continued macro uncertainty and the broad-based slowdown in digital advertising, as these reductions should help to better align Meta's cost structure with its current growth trajectory, appeal to current investor sentiment, and enhance overall operating efficiency." Ultimately, the news is clearly positive and should result in an upward revision to estimates. However, more will be needed before we can see a sustained move higher. As a result, we think Wednesday's update serves to help solidify a bottom in shares and provide cause for investors to become more constructive on the stock. However, we don't think it warrants additional exposure to the name as there are better areas to put money to work where the fundamentals are more in line with the macroeconomic landscape. We're sticking with our downgrade last month of Meta shares to a 2 rating and reduction in our price target to $150 per share from $235. Lastly, we want to acknowledge that Meta's announcement is in line with what we have been seeing across the industry and serves to help the Federal Reserve achieve its objective of slowing the economy to reduce inflation. (On that front, Thursday's release of the government's consumer price index will be of the upmost importance.) Here's a quick look at what our other Club companies are doing to control costs. Salesforce (CRM) confirmed that it let go less than 1,000 people on Monday. Reports had speculated that reductions would be more than double that. Qualcomm (QCOM) CEO Cristiano Amon told us last week that the chipmaker is prioritizing cutting down costs, including a hiring freeze. Amazon (AMZN) this week expanded its hiring freeze to its entire corporate workforce. Now that Covid is less of a problem, Amazon has been trying to right-size its operations, which were bulked up early in the pandemic to meet crushing demand. Alphabet (GOOGL), in forward guidance last month, said its fourth-quarter headcount additions are expected to slow to less than half the 12,765 hired in the third quarter. Management's actions to slow the pace of hiring should be more apparent next year. (Jim Cramer's Charitable Trust is long META, CRM, AMZN, QCOM and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Mark Zuckerberg, chief executive officer of Meta Platforms Inc., speaks during the virtual Meta Connect event in New York, US, on Tuesday, Oct. 11, 2022.

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