Foreign What's up guys! and welcome back to Wall Street Millennial On this channel, we cover everything related to stocks and investing. It's no secret that over the past year, Meta formerly known as Facebook has not been having a great year. Since its peak in September of 2021, the share price has fallen by 70 percent, which equates to roughly 700 billion dollars of market value evaporating. To put that into perspective, this destruction of value is greater than the annual GDP of Ireland. Meta's problems peaked on October 25th when they released their third quarter earnings results, which caused the stock price to Fall by 30 percent. At this point, Meta was the single worst performing stock in the entire S P 500 for 2022.. the results themselves were not that bad, but Meta CFO said the company expects to lose even more money on their Metaverse investments in 2023. For 2022, they are already on track to lose something on the order of 12 and a half billion dollars. This completely shot with little confidence investors still had in the company. With the share price down 70 and the economy likely heading into a recession, why was Zuckerberg planning to burn even more money on its Metaverse Ambitions which by his own admission is a decade away from being a viable business. By this point, Zuckerberg's personal Fortune had declined by more than 100 billion dollars. He finally woke up to the fact that he needed to do something drastic and quickly if he wanted to save his business. Empire Just a few weeks after the disastrous earnings call, Metta announced its largest headcount reduction ever, laying off 11 000 people or 13 percent of its entire Workforce. Of course, this is a sad day for the thousands of employees that were fired, but it was a long overdue move. The number of full-time employees that Meta employees had increased to 87 000 before the recent round of layoffs. This is almost double the 45 000 employees that they had in 2019. While they have made some minor changes to the core Facebook platform as well as some new features like Instagram reels, it's hard to tell what they needed these additional 40 000 employees for. And it's not just Meta. Over the past decade, the number of employees at the fan companies Facebook alphabet, Netflix, Microsoft and Google has almost tripled from 230 000 in 2012 to over 600 000. Today, we excluded Amazon from this list as a majority of their employees work in their Logistics and warehousing and thus are not comparable to the head count bloat that we've seen at other tech companies during the Tech Bull Market over the past 10 years. It appears that the mega cab technology companies went on a hiring binge going far beyond what their businesses actually needed. After Meta announced its layoffs, its share price rallied by more than 20 percent as Wall Street Loved a good cost-cutting story, but is it really that easy? Can a company really increase its profitability and share price just by laying off workers? In this video, we'll look at why Meta is laying off 13 of its Workforce and what this means for the company and its share price going forward. Given the economic turmoil gripping the world today, the best thing you can do is take your financial future back into your hands by starting your own side, hustle, or even a full-time business. And that's where today's sponsored Trends comes in. Trends is the ultimate knowledge and networking hub from HubSpot It connects you to emerging Trends and business ideas months before they're picked up by the mainstream media. One of the most interesting signals that I've read about recently is this one about increasing demand for senior care. As the U.S population ages, there's a huge gap in the market for affluent seniors who want light touch living assistance which can take the place of nursing homes. 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After a brief dip during the pandemic, Facebook's share price surged as increased demand for digital advertising allowed the company to achieve record revenue of 118 billion dollars and record net income of 39 billion dollars in 2021.. this pushed the share price up to 380 at the peak in September of 2021, briefly, giving the social media giant a one trillion dollar market cap. At this point Zuckerberg felt like he was on top of the world Facebook already had 3 billion monthly active users, so there was limited ability for the core business to expand. If he wanted to take Facebook to the next level, he would have to expand into new areas and he had a lot of ideas. For example, they created Instagram Checkout, a feature that would allow businesses and influencers to sell Goods directly on the Instagram app a new app called Lasso, which was meant to be a competitor to Tick Tock, their portable digital picture frame and tablet device, and their stablecoin Libra which people would be able to use for sending and receiving money on Facebook Libra was shut down by Regulators before he even launched. All the previously mentioned Ventures flopped and were either axed altogether or de-emphasized as it became clear that they were a waste of investment. All of these initiatives required new employees, so Facebook hired thousands of new software Engineers Hardware Engineers as well as armies of accountants, administrative workers, and HR people to manage the increasingly bloated Corporation Even as the projects that these workers were originally hired for were canned, most of the employees still kept their jobs. It's not to say that these workers were being paid to sit in chairs, but they were doing ad hoc and for the most part unimportant tasks without a clear strategic. Direction But with Facebook making record profits and its stock price soaring Mass layoffs were likely never on the agenda at Senior Management meetings Nobody wants to be the bad guy handing out the pink slips and the Metaverse is a whole nother story Zuckerberg Truly believes that 10 years from now you'll be watching videos like this one from your VR headset and he wants to control this next wave of techno technological advancement. Hence, his rebranding of Facebook to Meta and his commitment to investing 10 billion dollars per year in this area for the foreseeable future. Meadow's Engineers were mostly focused on web design, algorithms and tracking tools for digital advertisements. They didn't have experience in making the type of virtual worlds that Zuckerberg envisioned. arguably a video game company would be in a much better position to build a Metaverse. Knowing the old Facebook's limitations, Zuckerberg knew he had to hire thousands if not tens of thousands of software and Hardware Engineers to build up this capability from scratch during the boom years of 2020 and 2021. This wasn't a problem with the company making 40 billion dollars of annual net profit Investors were willing to stomach 10 billion dollars of Metaverse Cash Burn in 2022. Everything changed. The end of government stimulus, the Federal Reserve's rate hiking cycle, and Russia's invasion of Ukraine contributed to recession fears and a massive decrease in Ad spending, which is Facebook's bread and butter. Facebook was also facing some company specific issues, including Apple's privacy changes, which made it more difficult for them to track user data as well as increasing competition from Tick Tock We've covered both of these Topics in previous videos so as not to risk repeating ourselves. The links are in the description below if you want to get a better understanding of the headwinds facing Facebook's Core Business Long story short, a myriad of unfavorable developments caused a rapid deterioration of Meta's financial performance. Revenue from the family of apps segments which includes Facebook and Instagram decreased by four percent in the third quarter of 2022, as compared to the year ago period. While a four percent drop doesn't sound catastrophic, this is the first year-over-year Revenue decline since the company's founding in 2004. And remember that they continue to grow their head count. When you grow your payroll, while revenue is Contracting, you inevitably get a collapse of operating profit which fell by 28 year over year. When you include the Metaverse cash burn, the picture gets even worse with operating profit declining by 46 percent. To add insult to injury on the earnings call. Meta CFO Susan Lee Said quote: We do anticipate that reality Labs operating losses in 2023 will grow significantly year over year. Unquote Reality: Labs is what they call the segment that includes their Metaverse. Investments Wall Street Did not say kindly to this with Jim Cramer a long time Meta bull complaining that the company was spending endlessly on the Metaverse with no awareness of the impending recession. The stock market was coming to the opinion that Zuckerberg was running the company solely to satisfy his Metaverse obsession with no regard for shareholder value. After tanking 30 on the back of that earnings call, Meta was the single worst performing stock in the S P 500 for 2022, ranking 500 out of 500.. at this point, Zuckerberg's personal net worth had fallen by more than 100 billion dollars as the vast majority of his wealth is in his 13 ownership of Meta. He finally realized that his corporate strategy was not working and just a couple weeks later, he announced a 13 Workforce reduction. The announcement of the layoffs catalyzed the Monster Rally and Meta's share price, which rallied almost 30 percent. So what exactly do these layoffs mean in the previous earnings call? Zuckerberg said that they will still be increasing headcount in their highest priority areas while reducing headcount everywhere else. So what are their highest priority areas? One high priority area is Instagram Reels, which is their competitor to Tick Tock. Tick Tock is the single biggest competitive threat to Facebook so it is highly unlikely that they will be laying off Engineers who are working on reels. The second high priority area is the Metaverse. The fact that Susan Lee said that they will increase their Metaverse cash burn in 2023 strongly indicates that they'll be not laying off Metaverse workers. In fact, they'll likely be increasing headcount in this area. The layoffs will most likely be coming from the engineers who were left over from their previous failed Ventures like Libra portal and Lasso. In if this is the case, it is potentially very bullish. For Meta's share price, the average total compensation for a Meta-software engineer in the US is 180 000. If you multiply this by the 11 000 layoffs, this represents a cost Savings of about 1.9 billion dollars per year. With that being said, some of the layoffs will be administrative staff who get paid less, as well as people who are based in other countries besides the Us. But they also save money on employer-sponsored health care and other benefits beyond the salary. So a reasonable estimate for the cost savings is 1.5 billion dollars per year. Meta's market cap is 300 million dollars, so 1.5 billion dollars per year of savings is less than one percent of their market cap. However, their price to earnings ratio is only 11 times. This is well below the S P 500's P E ratio of 19..

the reason that Meta stock traded at such a deep discount to the S P 500 is because investors were scared that Zuckerberg would continue to increase head count and expenses. So, while the layoffs weren't that big in absolute terms, they were very big compared to the Baseline of Meta increasing headcount. That's why we saw such a massive rally. Another piece of evidence that points to Zuckerberg caring about shareholder value is a 50 billion dollar share we purchase in October of 2021. so far, they've repurchased 32 billion dollars of their own shares and still have almost 18 billion dollars left. Share BuyBacks are a form of returning Capital to shareholders and in theory, should help boost the share price. Despite the Metaverse investments in unfavorable macroeconomic environments, Meta is still profitable and they have about 30 billion dollars of net cash on their balance sheet. This puts them in a position to buy back even more stock in 2023 in conjunction with their layoffs. For most of its history. As a publicly traded company, Facebook was a growth stock. So long as Revenue was increasing, investors were willing to bid up the share price and they could continue hiring more employees. Now, revenue is declining and investors are trading Meta as a value stock. There's nothing wrong with being a value stock, but it means that you have to operate your company differently. It means that Zuckerberg can no longer just focus on the revenue line as he has done for the past 10 years. He also has to start paying attention to the expense line and it looks like now he has finally started to do just that. All right guys. That wraps it up for this video. What do you think about Meta's recent layoffs? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.