Meta is trying to do too much, and the cost of it is getting too big to bear for investors who long for the company’s heyday.
Meta investor Altimeter Capital’s chair and CEO Brad Gerstner wrote as much in an open letter to Meta CEO Mark Zuckerberg on Oct. 24. “Like many other companies in a zero rate world—Meta has drifted into the land of excess—too many people, too many ideas, too little urgency,” Gerstner noted, adding: “Meta needs to get its mojo back. [...] Meta needs to get fit and focused.”
With disappointing firsts like falling usage and dropping revenue in 2022, a realization has dawned that the core business isn’t quite indomitable. And the ambitious and expensive pivot—rebranding Facebook as Meta—has raised more questions than it answered, proving more disruptive than decisive. The company is due to release its quarterly earnings on Wednesday (Oct. 26) after market close.
Brad Gerstner’s argument, by the digits
55%: How much Meta’s stock is down in the last 18 months, compared to an average of 19% for its big-tech peers
23x to 12x: How much Meta’s share price-to-earnings ratio has fallen from, now trading at less than half the average P/E of peers
25,000 to 85,000: Increase in Meta’s headcount in the last four years
$45 billion: Meta’s operating profit last year
$10-15 billion: Meta’s annual investment earmarked into a metaverse project that largely includes artificial reality, virtual reality, immerse 3D, and Horizon World, which will take a decade to come to fruition
$30 billion: Meta’s capital expenditure in 2022, double from 2018. Excluding its large metaverse investment, Meta is investing more in capex than Apple, Tesla, Twitter, Snap, and Uber combined
“An estimated $100B+ investment in an unknown future is super-sized and terrifying, even by Silicon Valley standards.” —Meta investor Brad Gerstner.
How can Meta “get its mojo” back?
Gerstner recommends a three-step solution for Meta to double free cash flow to $40 billion per year.
👩💻 Reduce headcount expense by at least 20% by January 2023 to get back to mid-2021 staffing levels.
💸 Reduce annual capex by at least $5 billion from $30 billion to $25 billion; and Meta will still be able to maintain its core business, and keep investing industry-leading amounts in data centers and artificial intelligence
⚠️ Gerstner recommends writes the company cap metaverse/Reality Labs investments at $5 billion, adding that “I have been told that Amazon spent far less in total to build AWS (Amazon Web Services).”
Silicon Valley’s over-hiring problem
Meta, which has been trying to slim down its workforce with quiet firing, isn’t alone in feeling the burden of having hired too many people too quickly.
“It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people,” Gerstner wrote. “I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion.”
In an all-hands meeting a couple months ago, Alphabet and Google chief Sundar Pichai lamented, “There are real concerns that our productivity as a whole is not where it needs to be for the head count we have.” While the company hasn’t announced layoffs, it has resorted to quiet firing like Meta. Google has been giving employees 60 days to find new roles at the company before making them redundant—30 extra days if their projects were canceled.
Other companies are more overt about their downsizing decisions: Microsoft is cutting about 1,000 jobs citing “structural adjustments.” Trading app Robinhood’s CEO admitted the company “overhired” and fired 23% of its staff. Snap messily laid off 20% of its workforce as its financials took a hit.
Luckily for the axed employees, Gerstner believes they can easily find another job. “We have a shortage of talent in Silicon Valley. Meta and other large companies have made it very difficult for start-ups to hire,” he wrote. “We are confident that these employees will find replacement jobs and quickly be back to work on important inventions that will move us all forward.”
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