Meta Stock Rallies on Job Cuts. Zuckerberg Is Finally Listening to Wall Street.

Mark Zuckerberg finally caved.

The Meta Platforms founder and CEO announced Wednesday morning that the company is cutting about 11,000 jobs, reducing head count by 13%. Meta shares, which have been sliding all year, have rallied 6.8% on the news, which suggests that the parent of Facebook, Instagram and WhatsApp has finally accepted that it needs to take steps to shore up its struggling business.

The stock plunged 25% following the company’s recent third-quarter earnings report, largely because of a stunning projection for higher operating and capital expenses for 2023. A few days before Meta reported results, Altimeter Capital founder Brad Gerstner wrote an open letter to Zuckerberg urging him cut spending.

“Meta has drifted into the land of excess,” he wrote. “Too many people, too many ideas, too little urgency.”

Wednesday’s announcement suggest that Zuckerberg is finally paying attention to investors’ concerns, much to the relief of investors and analysts alike.

“At the start of Covid, the world rapidly moved online and the surge of e-commerce led to outsized revenue growth,” Zuckerberg said in a letter to Meta’s employees. “Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected.”

The CEO said that not only has online commerce returned to prior trends, but the weakening economy, increased competition, and “ads signal loss” have left Meta with much less revenue than he expected. “I got this wrong, and I take responsibility for that,” he wrote.

The question investors now face is whether Zuckerberg is doing enough to address the company’s new reality, which includes more intense competition for ad dollars from TikTok, Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX), and others; a softening advertising environment; and the lingering effects of Apple’s focus on protecting the privacy of iPhone users. Worries remain that the company’s huge push to build the metaverse won’t ever generate a payoff.

In addition to the layoffs, Meta confirmed its forecast for fourth-quarter revenue of $30 billion to $32.5 billion. Meta said the outlook for 2022 expenses it provided on the call to discuss its latest earnings already contemplated the newly announced cuts, and remains unchanged at $85 billion to $87 billion.

But the company also said it now sees 2023 expenses of $94 billion to $100 billion, which compares with a previous forecast of $96 billion to $101 billion, reflecting reduced hiring plans for next year. That amounts to a $1.5 billion cut, based on the midpoints of those ranges.

Capital spending in 2023 is expected to be between $34 billion and $37, the company said, reducing the top end of the forecast range from $39 billion. Meta also confirmed that it expects operating losses in Reality Labs, the business segment that includes VR headsets and the metaverse, to “grow significantly” in 2023 from 2022.

Analysts, particularly those who are bullish on Metal stock, reacted to the news with relief.

“Meta and Zuckerberg heard loud and clear the massively negative investor reaction to perceived lack of cost discipline during the Q3 EPS results…and have pivoted,” Evercore ISI analyst Mark Mahaney wrote in a research note. “It is clear to us that a lack of cost discipline is far and away the #1 issue weighing on Meta shares…and we think today’s news directly addressed this concern.” Mahaney kept an Outperform rating on the stock, with a target of $170 for the price.

Shares were near $103 on Wednesday afternoon, leaving them down 69% so far this year.

RBC Capital analyst Brad Erickson calculates that the operating-expense reduction connected with the job cuts could boost 2023 profits by 45 cents a share, while lower capital spending could add another 5 to 7 cents a share.

“While this announcement does nothing to alleviate the concerns around competition, signal loss and the perception of excessive Metaverse investment, it is the first sign the CEO has shown of being willing to acquiesce to shareholders’ desire for investing a bit more judiciously given the various headwinds the business faces,” Erickson said in a research note. Erickson maintained his Outperform rating and $150 target price on the stock.

J.P. Morgan analyst Doug Anmuth, who continues to rate Meta stock at Neutral, wrote that while he had hoped to see the 2023 expense outlook come down more, “the workforce reduction overall is likely bigger than most people had expected and shows management is operating with increased discipline.”

MKM Partners analyst Rohit Kulkarni expressed a similar view, saying that while the layoff were painful and might be demoralizing for the remaining staff, the cuts are a step in the right direction and show that “Zuckerberg cares about near-term investor expectations.” Kulkarni kept a Buy rating on the stock with a target of $140 for the price.