In this market, the last thing investors have been rewarding this earnings season is a bottom-line miss vs. expectations of any magnitude.
Except if you are Meta (META).
Shares of the social media giant exploded nearly 20% in pre-market trading on Thursday following a whopper of an earnings shortfall.
Here is how Meta performed compared to Wall Street estimates — at first blush it was far from rosy and deserving of a major push higher in the company’s market cap.
Investors have long loved Meta for its ability to print money but soured on the name in 2022 amid slowing sales and fresh restructuring efforts. But they may now be willing to overlook the quarterly shortfalls (see revenue weakness and ballooning Reality Labs losses) on signs of better profits ahead.
That better profit trajectory may come from two areas, both of which Meta execs played up on their earnings call late Wednesday (shocker!).
First is a newfound appreciation of running the business with an eye on productivity.
Meta sacked 11,000 employees (13% of its workforce) in November of last year amid pressure from large investors to shore up margins. Some of those cuts go as deep as canning cafeteria workers (see the tweet below). CEO Mark Zuckerberg says the company is just beginning its cost-cutting journey, much to to the delight of the Meta bulls.
“We closed last year with some difficult layoffs and restructuring some teams and when we did this, I said clearly that this was the beginning of our focus on efficiency and not the end,” Zuckerberg told analysts on the call.
Zuckerberg added “efficiency” was one of his key themes for 2023 alongside capitalizing on the fresh AI movement. When has he ever put efficiency ahead of innovation? Never, and the Street likes it.
The company then went onto slash its expense and capex guidance for the year by $5 billion and $4 billion, respectively.
The tone change from Zuckerberg wasn’t overlooked on Wall Street, which has been itching to reengage with the stock from a long perspective.
“While the reduction in the expense guide was expected, the magnitude of the change was a positive surprise,” Jefferies analyst and Meta bull Brent Thill wrote in a client note.
While Meta’s profits got a jolt from cost-cutting, there could be another boost coming from a material raise to the company’s stock buyback. Stock buybacks tend to reduce shares outstanding, helping to boost earnings per share.
Meta unveiled a new $40 billion stock buyback authorization, giving it $50 billion total capacity.
“The $40 billion increase in the share repurchase authorization provides additional EPS support,” Thill said.
We don’t suggest other companies go down the route of Meta and miss on earnings estimates. But if you are able to come to the table right now with success on the cost-cutting front and promises of more ahead — and have the money to toss at buybacks — then a Meta-like reaction in the market may happen even if profits come in light.
Again, this game isn’t for everyone.