Meta, formerly known as Facebook, reported Q4-2021 results after the market close on Wednesday, 2-February-2022. The market's reaction was abysmal with a decline of an astounding -25 percent and a loss of $240 billion in market cap for Meta... in a single trading session. Given the size of the one day decline, and given the company is a core holding, I thought it would be prudent to share the following notes.
Meta’s core results were solid—monthly (MAUs) and daily active users (DAUs) came in strong at 2.91 billion and 1.93 billion respectively, and ARPU (avg revenue per user) was very strong, in fact above expectations. The surprise came from both:
(a) how much they invested—or “lost” according to some—on the metaverse project, which was about $3.3b for Q4-2021 and $10 billion for the year; and
(b) the Apple privacy changes, which Meta says it roughly estimates as a $10 billion revenue headwind in 2022.
What’s puzzling given the market’s reaction is how well Meta/FB has handled what has been the biggest concern—the Apple privacy situation. Their core business in 2021 was still exceptional, even with the Apple privacy headwind in the last half of the year. For instance, revenue grew +20 percent YoY in Q4-2021, against very tough Q4-2020 comps, and will likely grow revenue by +17-18 percent this year. If there was a negative is was the operating earnings and margin decline, which was attributable investments in the metaverse and continued ad targeting modifications to compensate for the Apple move. On that note, the Apple privacy change has been primarily detrimental not to Meta but to smaller companies reliant on Facebook and Instagram advertising. Examples of companies who have mentioned this challenge include Pinterest, SmileDirect, Hasbro, and our very own Vera Bradley. This is just the tip of the iceberg. These type firms are still spending the ad dollars without the ability, so far, to be as effective in targeting those ads to customers who clearly desire their products; though there has also been general satisfaction/relief that Meta has been able to keep ad targeting fruitful, even if not quite as effective as before.
A relevant Twitter account to follow is @NikitaBier, the former Head of New Products at Meta/Facebook who left late last year to launch a start-up. He’s laid it all out—the good, the bad, and the ugly—as it pertains to Meta. And he’s solidified the case re: Zuckerberg being a great operator, which I’d gleaned from the outstanding performance of the business combined with both Peter Thiel’s remarks about his experience and Zuck’s inherent lack of natural persuasiveness (i.e., his awkwardness... he's achieved an awful lot given that lack of suave!). Bier lays out in the tweet below why sentiment is at or near a low, then why Zuckerberg is the guy to handle it and why it’s in our national interest for Meta to be a strong or the leading player in this market.
Regarding these type declines, since Jan-1-2003, Amazon has had eight -20% moves (and this excludes AMZN’s greater than -90% drop in the early 2000s).
Since Meta/FB’s going public, they’ve now experienced five -20% declines. Not fun, but I haven’t yet figured out how to totally avoid it and still be invested in public markets... or any sort of market. If you know anyone who has, I'd be open to a conversation.
We can also see from a log chart of FB (below) that the current downward move is similar to the four before it. Again, not fun—nor unusual. I think we’ll see in a couple weeks that this move was far more rapid than previous down moves, which has a lot to do with structural issues I’ve referenced a few times... algos determine how a stock responds in the after-market hours, before humans have even had a chance to consider real-world implications. Then when the price drops enough, institutions, pensions, and other rules-based allocators must sell simply to reduce exposure (or “risk”). This is the new era of public markets in which we get to operate... and a big part of why I’ve been trying to drive home that price movements are as de-linked from the fundamentals as they’ve been in many decades.
To put in perspective the impact algorithmic trading is having on short-term prices, the afternoon of Thursday 3-Feb (24 hours after Meta earnings) Pinterest (ticker: PIN) reported an MAU (monthly active user) decline of 13 million, or 6 percent. Revenue grew 20% YoY for Q4-2021, which happens to line up with Meta in round numbers. Within a few minutes, PIN was up +25 percent.
Price action used to be akin to the "one-eyed man leading the blind." Today it is more like the "blind leading the blind." And it is spawning some incredible opportunities.
Update - Feb. 4, 2022
Jim Cramer opined last night,
"...enough with the market's bizarre mood swings... We've got to calm down... what you're seeing is maybe the most emotional market I have come across in 13 years... Last night's quarter was not as horrible as people seem to think, but that doesn't matter does it?"
Cramer went on to reiterate what I mentioned in my note yesterday - that selling begets selling for no other reason than fearful, knee-jerk reactions and rule-based "exposure reduction." The full segment is worth watching.
Snapchat (SNAP) and Pinterest (PIN) both announced earnings "beats". I put "beats" in quotes because those earnings numbers mean little outside of how the underlying business is performing. They don't tell us what's really going on... only what revenue and expenses the company declared for the last period (which can be gamed by financial engineering - i.e., trickanery). If not backed up by respectable underlying business drivers (e.g., ARPU, users, site activity) favorably stated revenue and earnings announcements cannot and will not last. As I mentioned before, Pinterest's rough MAU/DAU results didn't line up with the stock's initial price reaction. (PIN later gave up those aftermarket gains.) Snap's overall user numbers were no doubt better --- and the overall report was solid. Still, according to Brad Erickson of RBC Capital Markets, “Management’s commentary makes it unclear if SNAP has made any actual targeting improvements" and the stock "lacks valuation support."
On the brighter side, as Michael Bloomberg's editorial points out, "Relentless competition of this kind is one reason why the U.S. tech industry is thriving... The market is making clear that tech companies are not the invulnerable monoliths some politicians have made them out to be. Any sensible regulation would work first from this principle."
Perhaps, as I referenced in our year-end letter, Alan Watt's story of the Chinese Farmer is relevant here. Very often in life and investing, what at first appears to be one way, after a complex series of interwoven reverberations and knock-on effects, turns out to be another.