Meta's Q4 beat and commitment to cost cuts is exactly what we've been waiting for

Published Wed, Feb 1 20238:01 PM ESTUpdated Wed, Mar 8 20232:09 PM EST

Meta Platforms (META) reported a fourth-quarter earnings beat Wednesday, while CEO Mark Zuckerberg labeled 2023 the "year of efficiency" in an effort reassure nervous investors like us that the technology giant is serious about controlling costs following a period of severe overspending. Revenue fell 4% year-over-year, to $32.165 billion, beating analysts' expectations for $31.53 billion, according to estimates compiled by Refinitiv. Earnings-per-share (EPS) fell 52% on an annual basis, to $1.76, missing analysts' forecasts for $2.22 a share. However, earnings were impacted by $4.2 billion in restructuring charges, lowering EPS by $1.24. It is unlikely those charges were reflected in analysts' estimates, making the $2.22-per-share figure an inaccurate comparison. Shares of Meta surged nearly 20% in afterhours trading, to around $183.50 a share. Bottom line Meta Platforms delivered what it needed to Wednesday evening, prioritizing efficiency in a sluggish revenue environment. The results showed the technology giant has finally struck a more sustainable balance between generating profits today with investing in its virtual-and-augmented-reality future, known as the metaverse. The quarter was certainly better than feared, especially in light of the soft engagement figures and grim view of the adverting market reported by competitor Snap (SNAP) on Tuesday. The difference in the two outlooks suggests Meta is taking market share. But the real kicker was that management lowered Meta's expenses outlook — by $5 billion. The market reaction to this revision is why we have long said Meta would rally once it cut down on costs through headcount reductions and other initiatives. The significantly reduced expenses forecast, coupled with better-than-expected first-quarter revenue, should lead to positive revisions to earnings estimates. And there should be some price-to-earnings multiple expansion, given that Meta has shown it's receptive to reining in expenses and now less likely to spend recklessly on unprofitable projects. As a result, we're increasing our price target to $195 from $150. Fourth-quarter commentary Meta reported both better-than-expected engagement, measured by daily active users, and monetization of customers, measured by average revenue per user. The Reels short-form video offering on the Facebook and Instagram platforms is one of the newer ways users can create content, with usage growing rapidly. Reels has allowed Meta to compete more directly with social media platforms like Snap's Snapchat and TikTok. The user transition to Reels from Stories and Feeds has created a slight headwind because the former monetizes at a much lower rate. But this is to be expected, given it's a much newer feature, which only launched in 2020. Meta is working hard to improve Reels' monetization efficiency — the revenue generated per minute of video watched — and by the end of this year, or early next year, the company expects the overall Reels headwind to be neutral. On its WhatsApp messaging application, business messaging is a feature Meta is actively working to monetize. The company said this evening its click-to-message ads is now at a $10 billion revenue run rate, a significant development. More broadly, on digital advertising, Meta's ad impressions across its services increased 23% in the fourth quarter, while its average price per ad declined 22%. An ad impression is whenever an ad is displayed on a user's application, so the higher the better here. The average price per ad is a figure we'd like to see increase, too, as it represents the cost to advertise on Meta's various platforms. Prices per ad have been negatively impacted by recent privacy changes that impact ad targeting. But Meta management said Wednesday that the company is making improvements to how it targets and measures ads, which should ultimately lead to a better return on investment for advertisers. Outlook We were pleased with Meta's quarterly results, but it was management's outlook that really got the stock moving after hours. Firstly, Meta said it expects first-quarter 2023 revenues to be in the range of $26 billion to $28.5 billion. At a midpoint of $27.25 billion, this was higher than Wall Street's estimates of $27.18 billion. The midpoint of the guidance is down about 2% from what the company generated last year but includes a 2% headwind from foreign exchange. Net-net, this flattish view is a sign that Meta is finally seeing a stabilization in revenues after last year's decline, which should allow the company to return to growth later this year depending on the macroeconomic environment. Even more significantly, Meta made hefty revisions to its outlook for expenses and capital expenditures,. The company now expects full-year 2023 expenses to be in the range of $89 billion to $95 billion. That's down about $5 billion from what it previously anticipated, due to slower-than-anticipated growth in payroll expenses and the cost of revenue. With total expenses in 2023 expected to increase by roughly 5% over 2022's $87.66 billion, we are finally seeing Meta align its expenses growth with revenue growth. Meta lowered its capital expenditures outlook by about $4 billion, to a new range of $30 billion to $33 billion. The midpoint of this range is $31.5 billion, well below estimates of $34.5 billion. Notably, the company said that substantially all of its capital expenditures continue to support its so-called family of apps. Does that mean the Meta is spending less time building out the metaverse? It could. And that's what investors — including at the Club — want to see because the core platforms are still cash-generating machines, while the virtual-and-augmented-reality operations are burning money. Lastly, Meta announced a $40 billion increase to its share repurchase program. That comes on top of the roughly $11 billion it had available at of the end of 2022. (Jim Cramer's Charitable Trust is long META. 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. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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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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