The Update Issue: A Volatile Earnings Season for Tech Continues, as Facebook Flops and Spotify Misses the Mark

Facebook parent Meta Platforms (FB) is dominating the headlines today as it suffers the worst single-day market cap loss in history... As of the mid-afternoon, FB shares are down nearly 30%, wiping out well more than $200 billion of market cap and about 18 months of stock appreciation. Putting this plunge into context – the […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: A Volatile Earnings Season for Tech Continues, as Facebook Flops and Spotify Misses the Mark By Berna Barshay Facebook parent Meta Platforms (FB) is dominating the headlines today as it suffers the worst single-day market cap loss in history... As of the mid-afternoon, FB shares are down nearly 30%, wiping out well more than $200 billion of market cap and about 18 months of stock appreciation. Putting this plunge into context – the drop in the stock today is roughly equivalent to the market caps of industry-leading companies like software provider Salesforce (CRM), athletic giant Nike (NKE), warehouse club Costco Wholesale (COST), and cable titan Comcast (CMCSA). If Meta's market cap loss was a company, it would be in the top 40 companies in the S&P 500 Index by market cap. It's an astounding one-day valuation loss. The big news on the quarter was two-fold. First, it looks like user growth is slowing down. Daily average users ("DAUs") were down in the fourth quarter versus the third quarter, marking the first time in its history as a public company that this has happened. The slowdown contributed to Meta missing earnings, a rare event only witnessed three times in its history as a public company. Another first... in conjunction with its corporate shift, Meta broke out its results into segments for the first time. Separating the company's "Family of Apps" from the investment in the metaverse, called Reality Labs, gave transparency for the first time on how much this big futuristic bet is costing Meta. Reality Labs generated a whopping $10 billion loss on $2 billion in revenue last year. Adding insult to injury, this wasn't a call that inspired confidence. By my count, the management team used the term "headwinds" 27 times during the course of the call. While conventional wisdom says the drop is about the earnings and DAU misses, I think it runs a lot deeper than that... While the headlines may be about the slowdown in user growth and metaverse spending losses, to me, there are two more important issues looming large after this call... First up is the effect of privacy changes at Apple (AAPL) on the business. Meta isn't the first company to get tripped up by the April iOS update that incorporated the option for users to opt out of app tracking. This change in the privacy protocol at Apple already claimed [social media company Snap (SNAP) and resale app Poshmark (POSH) among its many victims](. This time the iOS change bit Meta's Family of Apps... and one obvious question is how management didn't see this coming. But a more important question is how much this change will permanently impair Meta's ability to offer its advertising customers highly effective targeting. If the Apple opt-out tracking option erodes the targeting value proposition that Meta can offer its customers, then pricing on its ads could go the wrong way, which would of course pressure margins and profits. The other big glaring question after the quarter is where users are going if they aren't going on Facebook and Instagram. The answer is clear: TikTok. While management only mentioned rival social media app TikTok five (and not 27!) times on the call, the wildly popular app cast a long shadow over the discussion. TikTok is clearly siphoning off users from Instagram, and to a lesser extent, Facebook as well. Meta is fighting back with a big investment in its growing Reels feature. Consisting of short-form user-generated videos, Reels is a clone of TikTok that lives on the Instagram platform. Meta heavily sold the company's momentum with Reels but acknowledged that it has a monetization challenge with it. Reels cannibalizes time spent on Instagram Feeds or Stories, but this is currently problematic because monetization (through ad placement) on Reels is so much lower than on Feeds and Stories. CEO Mark Zuckerberg freely admitted the challenge ahead in leveraging Reels to fight back against TikTok... But I think sometimes when we say that there's – that we're closer to the beginning, what that means is that we still have a lot of kind of fundamental questions to overcome in order to make progress to get where we're going. With this product, what we see is, there is very clear product market fit, and it is growing incredibly quickly. [We] face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there. There was little on the call to offset the shock of the earnings miss and newly emerging strategic challenges. If I was to look for a bright side here, I would say this quarter could go a long way to bolstering any kind of legal defense in an anti-trust suit. Clearly, Apple was able to deliver a pretty big blow to Meta, and with the emergence of TikTok, the Family of Apps is experiencing more competition than ever. --------------------------------------------------------------- Recommended Links: [Hedge fund legend calls 'The End of Real Estate']( Few people see what's coming. But Whitney Tilson is predicting the end of real estate. And it's already starting. [Tilson reveals everything right here](. --------------------------------------------------------------- [The No. 1 stock to buy EVER?]( One of our analysts admitted, "I almost quit my job to buy this stock." He thinks we could be looking a potential double in weeks... and 1,000% gains over the next few years. This opportunity has crypto-like upside, but with far less risk than buying bitcoin. [Get the details right here, while this presentation is still available](. --------------------------------------------------------------- Meta is clearly facing more headwinds than it has in years... Not since its bumpy transition from desktops to cellphones has Meta faced bigger challenges. It should be noted though, it ultimately got through that tough transition well... As tough as the headwinds are from Apple's app-tracking changes and the explosive popularity of TikTok, I'm inclined to believe that Meta will muddle through, pivot, and once again find ways to operate in a fundamentally changed environment. In its corner, it has an incredibly large user base and an army of engineers working to create solutions to the challenges at hand. This is a company that spent $25 billion last year on research and development (R&D). As for its scale and reach, I will turn to my colleague Whitney's words from his daily e-mail this morning... It's easy to forget amid the near-term uncertainty that Meta remains one of the greatest businesses of all time. Keep in mind that 3.6 billion people – a staggering 61% of all people aged 15 and older on the planet – use one of Meta's services every month. This reach is a big arrow in Meta's quiver. While the losses at Reality Labs were a bit of a shock, the corollary to that disclosure is the revelation that the Family of Apps is even more profitable than we thought before. It posted a stunning 50% operating margin for 2021. I think Meta is down but not out. Facebook and Instagram have massive reach and margins, and the company has demonstrated before that it has the ability to pivot to meet a changing environment. The metaverse investment is indeed large, but so is the opportunity. Meta also has nearly $50 billion of cash on its balance sheet and is revving up its stock repurchases. While I think 2022 may be a volatile year for both its business and its stock, Meta shares are cheap here. Paying less than 20 times earnings for a company with this kind of market share and margin profile is compelling. For long-term investors who can stomach the volatility that accompanies uncertainty and bad press, FB shares are a compelling buy here. With a multiyear time horizon, this is a great place to initiate or average down on a position. Meta wasn't the only company setting off fireworks with an earnings report last night... Audio streaming service Spotify (SPOT) also provided its share of drama. With the company recently under fire for the content of its controversial but extremely popular Joe Rogan Experience podcast, SPOT shares plummeted more than 15% in the wake of its poorly received earnings report last night. As with Meta, the focus was on users. While Spotify results were largely in line with street expectations when it came to revenue and user growth – and even beat handily in terms of earnings, with the loss per share coming in at €0.21 versus consensus of a €0.39 loss – it was the guidance that spooked people. First-quarter guidance for subscribers was light. The reaction to this disappointing piece of guidance was exaggerated because of two factors. First, the slowdown in subscriber growth at video streamer Netflix (NFLX) had already prompted people to revisit their assumptions about market sizing and what it will cost to grow streaming markets. Second, Spotify declined to give full-year user growth guidance. This was a departure from prior practice... and it spooked investors. There's no question that user growth at Spotify is decelerating. Just take a look... Source: Twitter/@charliebilello Spotify also has yet to post a profitable year. That said, if you had given me the press release before anyone else saw it, I would have guessed that the stock would be flat or down 5% at most – not plunging like it is today. While the user guidance was disappointing, this was in all other ways a solid quarter. Unlike Meta, Spotify delivered investors a very reassuring call last night. Addressing the issue with subscriber growth and the lack of full-year guidance, CFO Paul Vogel did not mince words... With that being said, we do not anticipate any material changes in the trajectory for net growth in MAUs [monthly average users] and subs in 2022 when compared to the net growth we experienced in 2021. As for the weak first-quarter guide, he explained... With respect to the subscriber net adds in Q1, please keep in mind that we expect a different level of seasonality for this metric over the course of 2022 due to anticipated promotional campaign activity and other initiatives. This is a good explanation, and management also stated that they had seen no material change in churn trends, which is reassuring in the wake of the recent controversy over Rogan and the [giant publicity wave surrounding rocker Neil Young pulling off the platform](. Buried in the details were some other positive developments, like favorable royalty adjustments and market share gains in its podcast business. The biggest upside surprise was the 40% growth in ad revenue, and ad revenue growing to 15% of revenues in the quarter. For the full year, ads contributed 12% of revenues, which was a big jump from 9% in 2020... It's rapid progress toward Spotify's longer-term goal for ads to be 20% of the mix. It was a solid call and quarter, and I'm shocked the stock is down so much. I'm still a little on the fence about SPOT shares – I can make a bull case and a bear case for this stock. It's in the "too hard" bucket for me. But I do have conviction that the negative reaction to this quarter is way overdone. We're in a 'shoot first, ask questions later' market for tech right now... Netflix started off earnings season with a blast when it dropped 22% in the wake of disappointing results. It looked like this might have been an outlier after solid results from tech giants Microsoft (MSFT), Apple, and Alphabet (GOOGL). But that return to stability turned out to be head fake, as investors are demonstrating little patience with tech companies that miss expectations... In addition to the eye-popping drop at Meta today, payments giant PayPal (PYPL) fell 25% yesterday. These drops are a good reminder that tech investors especially hate earnings misses when they are paired with a deceleration in revenue growth. Tonight, all eyes are on earnings from social media apps Pinterest (PINS) and Snap. Given how much the app-tracking changes tripped up Meta, I expect rocky quarters from these companies as well. I'm not alone: PINS and SNAP shares are trading down around 10% and 23%, respectively, as I write. By the time this essay hits your inboxes, we'll know if they fell prey to the same factors as Meta. I don't think many people expected this much earnings volatility this quarter before Netflix reported, or even after it. This tweet from the Internet and media analyst at research firm Hedgeye turned out to be highly prescient... Source: Twitter/@HedgeyeComm With this much volatility, now is a good time to determine which companies you believe will be the long-term tech winners and make your shopping list. You might just get your dream price that seemed impossible mere months ago. In the mailbag, readers share how they are trading the market volatility... What's on your shopping list in tech if companies happen to take a tumble? What do you think of FB or SPOT shares at these levels? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "Hi Berna, I've been investing for myself since 2015 and still have a lot to learn. Mostly, this latest correction has encouraged me to tighten my stop losses to 10% and to use a 2/3 value versus 1/3 high tech, high growth ratio in allocating my portfolio in order to keep it better balanced. I also invest one-third as much in each high-tech, high-risk stock as I invest in a value stock. "At 74, I know I should be more conservative, but I enjoy being part of the future and find I learn a lot through studying the stock market -- one more skill I wish I had mastered much earlier in my life! Thanks for your thoughtful commentary. I enjoy getting a woman's point of view in addition to the 'hot-to-trot' and somewhat smug commentaries I read from a lot of white men." – Julie W. Berna comment: Julie, I think it's great that you are inspired by tech and the future. People should always keep looking forward, regardless of their age. And thank you for your kind words! "I enjoyed your comments about both companies, while Netflix has had some problems, they should be able to turn themselves around. I'm quite sure they are aware of others who are looking to displace them. Peloton (PTON) is going no place, bad publicity, and accidents. I wish them luck." – John G. Berna comment: John, I agree with how you see it! "I bought NFLX at $374." – Don B. Berna comment: Great entry and trading, Don! Regards, Berna Barshay February 3, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](