Stock Analysis & Ideas

Why Meta Platforms’ (NASDAQ:META) “Year of Efficiency” Strategy May Fail

Story Highlights

Meta’s mass layoffs have won the praise of many investors, but empirical evidence suggests many companies fail to achieve the desired results from layoffs. Instead, investor focus should ideally be on the company’s long-term growth prospects.

On February 1, Meta Platforms (NASDAQ:META) CEO Mark Zuckerberg announced that 2023 will be a “year of efficiency” for the company where the tech giant focuses on becoming leaner, more productive, and even more profitable. Prior to this revelation, the company slashed its workforce by around 13% last November, laying off 11,000 employees. On March 14, Meta announced that another 10,000 employees will be laid off as the company prioritizes efficiency gains this year.

Although mass layoffs may not achieve the desired long-term results due to empirical data discussed below, I am bullish on Meta Platforms as the company remains undervalued despite a stellar year-to-date market performance.

Meta’s Vision for 2023

In an update to Meta’s Year of Efficiency strategy on March 14, CEO Mark Zuckerberg emphasized the company’s focus on improving its financial performance amid challenging macroeconomic conditions. In addition to layoffs, the company has decided to freeze hiring as well, and more than 5,000 openings that were advertised will not be filled. In a more organic move, Meta is also looking at ways to improve the efficiency of product developers.

Meta, as part of its strategy to boost efficiency, has pledged to focus less on low-priority projects. Ever since the company’s name change in 2021, many investors have been skeptical about its multi-billion-dollar investments in the metaverse division. With a renewed focus on high-priority business segments, the company’s metaverse investments are likely to dry down this year. Investors will welcome such a development as Meta lost more than $13 billion from its Reality Labs division last year, which focuses on VR, AR, and the metaverse.

Layoffs May Not be as Good as They Sound

The investor sentiment toward Meta has dramatically improved this year along with Meta CEO’s promise to focus on efficiency gains. Mass layoffs have boosted the market performance of many tech companies – not just Meta – as investors cheered the prospects for better-than-expected operating margins and profitability for 2023. Although it is imperative for a company to have a lean operating model to be successful in the long run, as investors, overestimating the positive impact of layoffs could be costly.

Several studies conducted on the long-term effectiveness of layoffs show that companies should approach layoffs with caution. One study, conducted by Korn/Ferry International and Wisconsin Management Group, analyzed 1,000 firms that laid off employees between 2003 and 2007 and found that these companies failed to achieve any improvements in financial performance as measured by return on assets, profit margins, and economic growth.

Another study conducted by the University of Texas at Arlington and the Asian Institute of Management found that layoffs do not achieve any notable improvement in return on assets, return on equity, and return on sales despite the many benefits touted by companies at the time of laying off employees. Both these studies concluded that downsizing an organization could make it difficult for a company to enjoy competitive advantages in the long run.

Further, a Harvard Business Review analysis published in 2018 highlights how companies stand to lose in the long run as mass layoffs eventually make it difficult to retain high-quality talent, create unnecessary workplace pressure that results in low efficiency, and lead to a culture that does not prioritize innovation in the long run.

Apple, Inc. (NASDAQ:AAPL), the most valuable company in the world with a market capitalization of more than $2 trillion, has not jumped on the mass layoffs bandwagon since 1997, but the company seems much more efficiently run than any of its big tech peers. Apple, therefore, serves as a classic example of a company that has grown in leaps and bounds and realized operational efficiencies without resorting to mass layoffs.

A Long Runway for Growth

Despite the layoffs, Meta still has a long runway for growth, and investors should ideally focus more on these growth prospects and less on the expected efficiency gains resulting from layoffs. The Asia-Pacific user base of Facebook and Instagram remains under-monetized, WhatsApp is yet to be monetized, Reels are posing a threat to TikTok, and to sweeten the deal even further, multi-billion-dollar metaverse investments will start yielding desired results in a few years.

At a forward price-to-earnings ratio of around 21 (about 6% lower than its five-year average), Meta is valued as a mature company with limited growth expectations, whereas, in reality, the tech giant is still in the early stages of its growth story.

Is Meta Platforms a Buy, According to Analysts?

Meta’s renewed focus on operational efficiency has won some praise from Wall Street analysts, including Baird analyst Colin Sebastian who reiterated his Buy rating for Meta following the announcement of the new round of layoffs. According to the analyst, Meta’s layoffs are not just about prioritizing the most critical business segments but also about the benefits the company now enjoys by automating certain business processes thanks to its substantial investments in artificial intelligence (AI) technology.

Based on the ratings of 45 Wall Street analysts, of which there are 36 Buys, six Holds, and three Sells, the average META stock price target is $224.88. This implies upside potential of 14.96% from the current market price.

The Takeaway

Meta’s mass layoffs have won the praise of many investors and analysts in the last few months, but empirical evidence suggests many companies fail to achieve the desired results from these cost-cutting measures. However, regardless of the success of these layoffs, Meta Platforms is well-positioned to grow and looks attractively valued.


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