Benzinga - META's meaningful rally since forward revenue revisions and the stock bottomed last November (post 3Q earnings miss) is over, and it's time to lighten the load on a misperceived safe play in a troubled macro. Benchmark analyst Mark Zgutowicz reiterates a Hold rating on Meta Platforms Inc (NASDAQ: META).
While 21k collective headcount cuts announced in November (11k) and March (10k) set the stage for the "Year of Efficiency" quite tangibly on the cost side of the P&L, FY23 and FY24 revenue expectations are ignoring what the magnitude of these cuts imply.
Specifically, Zgutowicz expects FY23 and FY24 revenue will fall -7% and -14% short of consensus and the same shortfall in operating income despite his conservative cost assumptions.
The high correlation of revenue to average headcount growth and revenue analysis vs. total expense growth per employee supports the analyst's thesis, which he highlights in a Friday note titled, "Eyes Should Be On Revenue Not Costs In "Year of Efficiency."
The analyst also highlights why the stock tops at ~1.10x the S&P NTM P/E with limited EPS and multiple expansion potential. Over the past five years, META revenue growth exceeded average headcount growth in just 1 (FY21 COVID benefit) year.
While Meta's FY23E average headcount growth of -6% Y/Y assumes FY23E headcount of 65.5k, down 21k from FY22 and 2% Y/Y FY23E revenue growth is arguably high (above headcount growth) while still well below consensus' +5% Y/Y.
The analyst also finds it noteworthy that all of Meta's announced 21k cuts fall in FY23 (e.g., no impact on weak FY22 -1% Y/Y revenue), so 2023 is META's first year with a headcount deficit and a massive one to boot.
The analyst's FY23E revenue per employee implies a return to growth despite a consecutive 6-year downtrend (ex FY21 COVID benefit), while consensus revenue implies a much more aggressive revenue reversion trajectory.
Considering the magnitude of headcount, reset the analyst view consensus' FY23 and FY24 growth reversion as simply unrealistic.
The analyst maintains a macro view that ad spending will weaken throughout the year as the negative lag effect of rate hike cycles begins to curtail consumer spending. And while these anticipated macro headwinds will impede META growth, its peak digital share weighs perhaps more on management's longer-term contemplation of cost efficiencies.
Price Action: META shares traded higher by 0.95% at $209.82 on the last check Friday.
Latest Ratings for META
| Jul 2020 | Desjardins | Initiates Coverage On | Buy |
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