There's Still A Cost Associated With Meta's 'Year of Efficiency'

Although job cuts will boost revenue per employee, margins are unlikely to fully recover.

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Meta Platforms META 6.15% fires people all the time, and Wall Street loves it. A little bit too much, perhaps. 

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Facebook's parent company said Tuesday it plans to lay off 10,000 more employees this year. Based on last week's Trade Algo report, that would be about 13% of the remaining workforce following last year's announced job cuts.

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Founder and CEO Mark Zuckerberg wrote to employees that the reductions will begin this week with the company's recruiting team, then spread to its technology and business groups. Approximately 5,000 open positions that have not been filled will also be closed by Meta. 

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In his 2,100-word blog post, Mr. Zuckerberg mentioned seven times that the move is part of the social network's "Year of Efficiency," a term he referred to seven times. There is no doubt that it will have an impact on the world. There was a surge of hiring that reduced Meta's annual revenue per employee by 18% last year, bringing the company's annual revenue per employee to about $1.35 million -- its lowest level since 2014. Based on the current Wall Street projections of Meta's revenue for this year, it is estimated that the announced cuts will bring this number to a record high of $1.85 million. This revenue forecast assumes that there will be a partial recovery in the online advertising market, which is not a sure thing. 

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But even if there were no revenue growth this year because of the reduction in headcount-the company's revenue per employee would still be about 16% higher than what it has averaged over the past five years despite the revenue growth. It is this kind of news that has investors cheering. As the first layoffs were announced in early November of last year, Meta's stock price rocketed by more than 6% Tuesday morning, adding to the gains that already had the share price surging by 78 percent since the first layoffs had taken place. In that timeframe, the Nasdaq Composite has gained almost eight times as much as it did during the same period.

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Based on FactSet, Meta trades at a premium of 8% to Alphabet Inc., the parent company of Google. It has been trading at a discount to its larger rival for most of the past year.

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These gains could be premature based on the hopes that drive them. Despite the severe cuts, Meta has only reduced its full-year expense range by 3% for 2023, according to a filing Tuesday. As Zuckerberg himself stated in his memo, he does not expect business conditions to improve significantly in the near future. 

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This year could also bring plenty of internal turmoil according to Meta's plan outlined by Mr. Zuckerberg. "Many managers will be asked to become individual contributors," effectively demotions, he said.

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Meta's CEO also hinted at moving employees back into the office-a major change from just a year ago, when it was dispersing employees and officers around the world in what looked like an internal hard-sell of its metaverse plans.

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Zuckerberg did not indicate any intention to backtrack on his metaverse vision, noting on Tuesday that it remains an integral part of defining the future of social networks.

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Due to Facebook's hard pivot toward this direction at the end of 2021, the company's costs inflated and investors fled from the company. Meta faces a variety of challenges including a world of slower growth, expensive artificial intelligence technology, as well as the need to maintain investments into the safety and security of its Facebook and Instagram platforms that still drive nearly all of the company's revenue. The average operating margin of Meta over the next three years is expected to be 27%, compared with an average of 34% over the last three years, according to analysts. 

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Even though Mark Zuckerberg has fewer friends these days, his bills keep growing.