Wall Street Breakfast: Meta(re)verse

Meta(re)verse

Meta Platforms (META) cratered 20% AH on Wednesday following a mixed Q3 earnings report where the company topped revenue expectations, but missed on profits and warned of near-term sales challenges. The results wiped $65B off of Meta’s market capitalization, and followed a megacap selloff prompted by the earnings of fellow tech giants Alphabet (GOOG, GOOGL) and Microsoft (MSFT) (and even Snap (SNAP) last week). Serious concerns have surfaced in the advertising space, partly due to Apple’s (AAPL) privacy changes, as well as rising competition from rivals like short-form video app TikTok.

By the numbers: Meta’s revenues fell by 4%, better than expected, to land at $27.7B, while costs and expenses weighed on operating income, which tumbled by 46% to $5.6B. Meanwhile, Facebook daily active users rose 3% to 1.98B, above an expected 1.86B, and monthly active users rose 2% to 2.96B (just short of expectations for 2.97B). As for its “Family of Apps,” including Instagram and WhatsApp, family daily active people rose 4% to 2.93B, and family monthly active people rose 4% to 3.71B. Ad impressions across the family even rose 17%, but average pricing per ad fell 18%.

“While we face near-term challenges on revenue, the fundamentals are there for a return to stronger revenue growth,” CEO Mark Zuckerberg said in his typically terse initial earnings comment. “I appreciate the patience and I think that those who are patient and invest with us will end up being rewarded.”

Meta losses: Revenue from Reality Labs, the company’s metaverse unit, nearly halved to $285M in Q3, while losses were $3.7B compared with $2.6B a year ago. The company expects operating losses for the division to “grow significantly year-over-year” in 2023, but still believes that’s where its future lies. So far, Reality Labs has bled $9.4B this year and investor scrutiny will only increase over Meta’s experimental pivot to a digital avatar-filled universe. (400 comments)

GDP update

Following two consecutive quarters of negative growth, and a technical recession, the U.S. Commerce Department today will report GDP figures that will provide the latest snapshot of the American economy. Forecasters expect the nation to grow again in the July-to-September quarter, predicting an annualized expansion of 2.3%. That would mark a sharp reversal compared to the contractions of 1.6% in Q1 and 0.6% in Q2, and may mean the economy can weather more Fed rate hikes than previously expected.

Fine print: Pay extra attention to the details in the report, which could skew numbers in either direction. For example, slowing imports has led to a narrowing of the trade deficit and will likely boost the GDP number, though it’s also an indicator of slowing domestic demand. Other key components may be influenced by the central bank’s rapid hikes in interest levels, like residential fixed investment, which has been crushed by the recent surge in mortgage rates.

So far, a mixed bag of economic data has been on display, with the latest picture changing day-by-day. Employment numbers are still strong, while spending and retail figures continue to appear robust. On the other side of the equation, inflation (and core) continue to remain high, housing prices are beginning to decline, there’s an escalating energy crisis, and the Fed can’t guarantee that its aggressive monetary policy won’t push the economy over the edge.

A different perspective? “There’s a lot of stuff on the horizon which is bad and could – doesn’t necessarily – but could put the U.S. in recession. That’s not the most important thing we think about. We’ll manage through that,” JPMorgan (JPM) CEO Jamie Dimon told the Future Investment Initiative Forum. “I’d worry much more about the geopolitics of the world today. The relationships of the Western world would have me far more concerned than whether there’s a mild or slightly severe recession [in the U.S.]” (18 comments)

Brands dump Ye

“I can say antisemitic things and Adidas can’t drop me,” said Ye, formerly known as Kanye West, before the sportswear manufacturer dropped the embattled artist as a partner. It’s now been several weeks since his tirades against Jews have prompted headlines, as well as other racially insensitive incidents. In the meantime, a corporate backlash has ensued following Ye’s rants and remarks that have sparked widespread condemnation.

Snippets: “The Jewish people have their hand on every single business that controls the world… I’m going death con 3 On JEWISH PEOPLE… I’m #MeTooing the Jewish culture right now and saying ya’ll gotta come out and say what you have done… By the fact I cross the antisemite line… and vibe, calling out the Jewish media and mob culture, I’m here to finish the job.”

Prior to Adidas (OTCQX:ADDYY) dropping its lucrative partnership with the rapper (which will result in a $250M hit for the company), Gap (GPS) removed Yeezy products from store shelves. TJX Companies (TJX) and Foot Locker (FL) have also severed ties with Ye, while luxury fashion house Balenciaga (OTCPK:PPRUY) ended their relationship. Elsewhere, Spotify (SPOT) said it will still keep streaming his music unless his record label requested it be removed, though Peloton (PTON) has pulled his tunes from their platform.

Looking elsewhere? Skechers USA (SKX) said its executives escorted Ye out of a Los Angeles corporate office on Wednesday after he “showed up unannounced and uninvited.” Ye arrived with his own camera crew and demanded to meet with executives, but the footwear maker confirmed that it “has no intention of working with West.” “We condemn his recent divisive remarks and do not tolerate antisemitism or any other form of hate speech,” Skechers said in a statement. (6 comments)

ECB Day

European market spillover, as well as the euro itself, will come into focus this morning, as the ECB gets ready to lift its main interest rate to the highest level since 2009. Policymakers are expected to follow in the footsteps of the Fed, which has raised rates by 75 basis points at its past three meetings, by pushing the ECB’s deposit rate to 1.5%. Inflation across the bloc has already soared to 10%, and an energy crisis this winter – triggered by Russia’s war in Ukraine – could exacerbate the economic situation.

Commentary: “Falling natural gas prices give the ECB some justification for slowing the pace of tightening [later this year], and the bank would rather go big now to prove it’s serious about inflation,” noted Luca Paolini, chief strategist at Pictet Asset Management. “By December the main worry will not be inflation, but the decline in economic activity.”

Rate hikes are not the only thing on the table at the ECB’s October meeting. The central bank is expected to discuss ways to start shrinking its balance sheet, or a process known as quantitative tightening. Assets have more than quadrupled over the past eight years to a total of €8.8T, a figure that is comparable to 70% of eurozone gross domestic product.

Outlook: Another thing to watch is lending conditions, and if the environment will change for European banks. The ECB may make some announcements surrounding Targeted Longer-Term Refinancing Operations, otherwise known as TLTROs, which encourage banks to lend to businesses and consumers in the eurozone. Pay attention to remuneration, cost, timing, and a possible system of tiering linked to reserves.

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