Meta Preps Major Metaverse Cuts, Analysts Predict Earnings Pop

Core Viewpoint - Wall Street analysts have rerated Meta Platforms Inc following the company's consideration to cut up to 30% of its 2026 Metaverse budget, primarily affecting the Quest virtual reality unit and Horizon Worlds, which represent the majority of metaverse-related investments [1] Group 1: Budget Cuts and Financial Projections - JP Morgan analyst Doug Anmuth projected that Reality Labs spending will reach $21 billion in 2025 and $26 billion in 2026, with a potential 30% reduction in metaverse spending saving up to $5 billion [2] - If the savings are derived from headcount reductions, Meta could potentially cut approximately 11,000–13,000 employees, which would account for 15–17% of its workforce as of Q3 [3] - Anmuth maintained his expense estimates for 2026 at $153 billion (up 30%) and capex at $115 billion (up 61%) [5] Group 2: Expense Management and Growth Drivers - The analyst emphasized the importance of maintaining GAAP EPS growth, operating income expansion, and positive free cash flow during heavy capital expenditures [4] - A 10% cost reduction across the rest of the business could yield an additional $10 billion in savings, although these cuts are expected to be reallocated to data center and AI investments [8] - Despite anticipated material cost growth in 2026, Meta appears to have flexibility in cost allocations to protect EPS growth amid macroeconomic pressures [8] Group 3: Market Sentiment and Future Outlook - The shift in Reality Labs spending is seen as constructive for market sentiment, addressing investor concerns regarding long-term Metaverse investments [9] - Analysts foresee multiple growth drivers for 2026, including increased usage, AI enhancements, and new advertising opportunities, which could elevate revenue beyond current estimates [9] - Upcoming catalysts include the launch of Meta Business AI and new user-facing AI products expected in 2026, with initial guidance for 2026 expenses projected to grow 28–38% year over year [11] Group 4: Analyst Ratings and Price Forecasts - Doug Anmuth from JPMorgan maintained an Overweight rating on Meta with a price target of $800 [10] - Justin Post from Bank of America Securities reiterated a Buy rating on Meta with a price target of $810 [10]