Meta's metaverse payoff ‘likely quite a ways away,’ analyst says

Piper Sandler Analyst Tom Champion joins Yahoo Finance Live to discuss Meta earnings, tech layoffs, the metaverse, the expectations for investors, and the outlook for Meta.

Video transcript

- All right, well, let's stay on that theme of layoffs and lock in on tech. Meta in focus this morning as shares are soaring pre-market. Also, the top ticker on the Yahoo Finance platform. That is after an impressive earnings call by CEO Mark Zuckerberg, who is aiming to be more efficient this year. Take a listen.

MARK ZUCKERBERG: 2022 was a challenging year, but I think we ended it having made good progress on our main priorities and setting ourselves up to deliver better results this year, as long as we keep pushing on efficiency.

- All right, joining us now to break it all down is Tom Champion, Piper Sandler director and senior research analyst. Tom, good to see you here this morning. So you have, I think, Zuck having a come to Jesus moment in terms of expense cuts. You have a Fed that may be not raising rates next year. Are you getting an ultimate buy signal here on Meta shares?

TOM CHAMPION: Yeah, absolutely. I think this quarter was a real sea change from what we heard, say, last quarter. And it was a terrifically disappointing earnings report last quarter. But they've taken tough action. They've laid off 13% of the workforce, and they're reducing spend on the office footprint and making other changes and being much more mindful on CapEx spend as well. So it's a big change for this company, and it's and it's resulting in a much more favorable outlook for free cash flow.

- How much of this is narrative from Mark Zuckerberg? And I ask that because he's talking about things like, all right, yeah, we're going to cut back on some of the metaverse spending. Of course, they had ramped that so early on. They're going to boost their reliance on AI to really drive some operational efficiencies as well. And so in this year of efficiency that he's laid forth, how much of that is true in terms of it being something that they're saying versus something that in action is long term sustainable and going to trickle down to margins?

TOM CHAMPION: Well, there's a narrative element to how they're talking about the products. There's no question. They're saying that AI technology is helping them boost conversion of the ad product by 20%. There is a narrative element about how they are continuing to manage IDFA and the Apple ATT headwinds. But after the quarter, we're left with a gap OpEx outlook for 2023 that it's $5 billion lower than we were given in November following the 8K that announced the headcount reduction.

That's real. That's significant. That's not a narrative change. That is what's now embedded in expectations, and that's a far larger improvement than we thought was likely going into the print. There's a similar reduction to CapEx. So you're right. It is a narrative change, and talking about things like the year of efficiency is a little less maybe grand or ambitious than talking about the next computing platform in the metaverse. But it's having a palpable impact to street estimates, and we can see that in the stock.

- Tom, is Meta still spending too much on the metaverse?

TOM CHAMPION: Yes, I would argue that's the case. I think the payoff on the metaverse is likely quite a ways away. And so the investment that it's kind of measured in like $10-plus billion, in our view, seems outsized. But who are we to say how Mark Zuckerberg should run his company? He's an icon and a great entrepreneur. So this is his judgment call.

- Well, we're the shareholders, in theory.

TOM CHAMPION: Yes, well, so is he. And it is one part of the equation. And he is certainly addressing the cost structure in the core business and making some very, very difficult decisions. So we certainly applaud him for that.

- Tom, as someone that covers tech more broadly, are you more inclined to get more bullish on your coverage universe, like a Meta, like the other names you cover, because the Fed may not be raising rates by the middle of this year?

TOM CHAMPION: Yes, I think that is a factor, right? The Fed rate cycle has introduced a tremendous amount of uncertainty, and it impacts our view of the discount rate. So the sooner we get to the conclusion of the interest rate hike cycle, the better for tech stocks, no question.

- Yeah, most definitely. And that's obviously reflected in some of the action that we saw in these stocks yesterday. Tom, thanks so much. Really appreciate your time this morning. Tom Champion is Piper Sandler director and senior analyst talking to us about Meta.