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Market Insights

Google & Microsoft Disappoint, Meta Horrific

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Earnings reports this week are showing chinks in the armour of the once invincible megacap big tech stocks. Google and Microsoft both disappointed somewhat. Meta (Facebook) was a completely different level of awful, sending the stock 20% lower in after hours trade…

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__How can your report be so bad that it wipes $67 billion from your market value in a matter of hours? __

First up, declining revenues. Since the peak of $33.67bn in Q4 2021, this is the sequence of reported revenues:

  • Q1 2022: 27.9bn
  • Q2 2022: 28.8bn
  • Q3 2022: 27.7bn

Hardly a disaster. There’s some missing context however... Operating expenses keep increasing.

Meta forecasts that its full-year 2023 total expenses would be $96 billion to $101 billion, notably higher than the estimate for 2022 total expenses of $85 billion to $87 billion.

Peaking/declining revenues and projections of higher expenses mean lower profitability…

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The profit decline is already underway, and Meta CFO David Wehner says that although they’re aware of the rise in expenses it will take time to see the impact:

To provide some context on the approach we are taking towards setting our 2023 budget, we are making significant changes across the board to operate more efficiently. We are holding some teams flat in terms of headcount, shrinking others and investing headcount growth only in our highest priorities.

As a result, we expect headcount at the end of 2023 will be approximately in-line with third quarter 2022 levels. We have increased scrutiny on all areas of operating expenses. However, these moves follow a substantial investment cycle so they will take time to play out in terms of our overall expense trajectory.

On the earnings call, Jefferies analyst Brent Thill asked the all-important question:

"I think kind of summing up how investors are feeling right now is that there are just too many experimental bets versus proven bets on the core ... I think everyone would love to hear why you think this pays off."

CEO Zuckerberg remains confident that they can overcome the challenges, although, once again, says it will take time:

“…there are a lot of things going on right now in the business and in the world. And so it's hard to have, like, a simple we're going to do this one thing, and that's going to solve all the issues. I mean there's macroeconomic issues. There's a lot of competition. There's ads challenges, especially coming from Apple.”

“And then there's some of the longer-term things that we're taking on expenses because we believe that they're going to provide greater returns over time. And I think we're going to resolve each of these things over different periods of time. And I appreciate the patience. And I think that those who are patient and invest with us will end up being rewarded.”

Patience is a tough question in this environment. And it’s not just Meta. Google also reported a slowdown in ad revenues (Snapchat was the canary in the coalmine here) while Microsoft saw slower PC demand hit sales of their Windows software. The rapid growth of their Azure cloud solution also slowed.

This was the market reaction across the S&P500 yesterday (via FinViz):

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Tough times for the mega caps. All eyes on Apple & Amazon reporting after hours today. Can they buck the negative trend?

Not investment advice. Past performance does not guarantee or predict future performance.

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