Tech giants Meta, Microsoft find the next killer app: efficiency

The Facebook owner pushes the metaverse further down the road as it adjusts to the new reality for tech companies.

Forget the next big killer app, the new thing sweeping Silicon Valley is efficiency, and tech giants are outdoing themselves to embrace it.

With Facebook’s owner Meta in the process of sacking 11,000 staff around the world, founder Mark Zuckerberg declared his management theme for 2023 is “the year of efficiency”.

With the cost of funds moving sky-high through multiple interest rate hikes and top line growth slowing, investors are no longer enamoured with technology stocks. This has triggered tens of thousands of job losses across names like Amazon, Google’s Alphabet, Microsoft and of course Elon Musk’s loss-making Twitter. The bulk of the cuts have hit in the US, but the ripple effect is being rudely felt around the world, including Australia with job losses mounting. It also means tech companies, forever known for putting investors last, are now learning to look after the people who are paying the bills.

Multi-billionaire Zuckerberg got a brutal lesson from markets last year, when he was talking up even bigger spending plans on blue sky projects, including building out the metaverse – the virtual reality based internet that few are rushing to embracing. Last October, he badly misread the mood of the market, which sliced Meta’s shares 26 per cent after it missed earnings targets and warned of higher costs.

Tech giants are being forced to become more investor friendly. Picture: AFP

On Thursday morning, it was a different story, with Meta pledging to cut more costs even after the job cuts while delivering an investor sweetener of a $US40bn extension to a share buyback. These moves sparked a 19 per cent share price surge in after hours trading.

The comments came on the back of Facebook’s fourth quarter update where net profit was off 55 per cent to $US4.7bn, after taking hefty restructuring charges. However, revenue for the quarter was resilient, rising 4.5 per cent from the same time last year.

Zuckerberg has slashed capital expenditure by $US4bn to be in the range of $US30-33bn, mostly as he looks for savings across a data centre construction project.

He said the tech company has entered “phase change” after growing so quickly over nearly two decades.

“It’s very hard to really crank on efficiency while you’re growing. I just think we’re in a different environment now”.

“It really just makes sense to really focus on the efficiency a lot more than we had previously,” he said on the call.

As part of the renovation of Meta, Zuckerberg is “flattening” the organisation and removing layers of middle management to speed up decisions. He is also merging artificial intelligence tools into work processes, something he believes will make his engineers more productive.

Zuckerberg also promised to be more proactive about cutting projects that aren’t performing or may no longer be a priority. This could be a cue to tackle some of the heavy losses across Realty Labs, Facebook’s metaverse unit.

Facebook boss Mark Zuckerberg says the tech company will become more efficient. Picture: Michael Nagle/Bloomberg

“I think that there’s going to be some more that we can do to improve our productivity and cost structure. And by working on this over a sustained period, I think we’ll both build a stronger technology company and become more profitable,” he told analysts.

It's not just Zuckerberg, last month Microsoft chief executive Satya Nadella said the tech sector had to lead by example in getting more efficient.

“We will have to show our own productivity gains with our own technology,” Nadella said.

Also helping the mood for Zuckerberg was less talk about the yet to be proven metaverse and more focus on artificial intelligence, which is spreading like wildfire through the sector.

Zuckerberg said his priorities haven’t changed, although AI is all about today, where the development of metaverse products is a longer term project.

Indeed, AI is the new nuclear arms race between the tech majors and so far Microsoft has the edge over other major players through its backing of OpenAI, the start-up behind the revolutionary ChatGPT tool. Microsoft stepped up its investment last month and will use its Azure cloud platform to power the OpenAI applications. The stakes will be high in AI, although investors have been warned it comes with significant fixed hardware costs, given it requires more expensive servers and networking equipment.

Meta’s AI push has real world revenue, with the technology set to drive more video content through to users of its Facebook and Instagram platforms.

This also leverages Meta’s recently-launched video content tool Reel, designed to take on TikTok, the China-backed social media app that has been carving up Facebook’s younger users.

Reel plays across Meta’s platforms have more than doubled, with engagement increasing, although Zuckerberg acknowledges revenue hasn’t kept pace with this growth.

WhatsApp, while widely used, is another revenue puzzle for Zuckerberg, with Meta looking to sign up more business users to help pay for the platform.

China bull

Regal Partners’ Phil King is the latest to join the ranks of China bulls as the Asian powerhouse works through its Covid-19 peak. King’s comments confirm a major reassessment of China is underway with the outlook for the economy robust. Of course a rising China lifts all of Asia, including Japan and South Korea.

They also come as Beijing on Thursday night said Australia and China will hold a trade ministers meeting next week via video link.

In an investor letter King noted China had been declared as “uninvestable” by a number of fund managers, mostly as they wanted to avoid tough conversations with clients while geopolitical risks were high. The mood was spurred on by the increased enforcement of anti-monopolistic policies, and then by the rising political dominance of Chinese president Xi Jinping. But the reopening of trade is well underway. Indeed the CSI 300 Index, which tracks shares in major Chinese companies, is up nearly 20 per cent from the October low, putting it in close to bull market territory.

“We believe that China may now materially outperform, as the impacts of the domestic government decisions abate, with Hong Kong-listed shares in particular able to generate long returns in 2023, even if conditions deteriorate in other global markets,” King said in a letter to investors.

China’s economy is rebounding following the relaxation of strict Covid-19 curbs. Picture: AFP

King’s team has recently taken charge of the former VGI Partners Asian Investments fund, following the merger between the two funds last year. The ASX-listed fund has since been renamed Regal Asian Investments and returned negative 5.3 per cent for the year to end-December. However the second half saw returns jump 9.5 per cent.

The fund is built around a 60 per cent long investment and 40 per cent short strategy with holdings across Australia, Japan and Hong Kong. The $500m fund counts holdings from Woodside and graphite play Syrah Resources. It also has holdings in China tech names Alibaba Group and search major Baidu. The fund forms part of King’s $5.1bn family of Regal funds.

King notes two significant Chinese government domestic policies in recent years have been measures to deleverage real estate developers and tough zero-Covid policies but these have been rolled back. Since late last year the fund has been building up long positions in Chinese companies listed in Hong Kong.

King pointed out that investing in China does come with higher political risk and has been careful to target investment towards companies that are aligned with Beijing’s objectives.

Originally published as Tech giants Meta, Microsoft find the next killer app: efficiency