Will Meta Echo Alphabet's Warnings?

This morning, Microsoft (MSFT) shares are trading lower… as we expected.

But semiconductors are screaming higher, thanks to three magical words uttered by Microsoft’s management.

No, it wasn’t “stuffed crust pizza,” “Maybe you’re right,” “Let’s get drunk” or anything by Uell Stanley Anderson (Spoiler: they’re Believe, Expect and Accept).

It was: “increased capital spending.”

Big tech is still shelling out big bucks to build out the necessary artificial intelligence (AI) infrastructure. And that means there’s no slowdown in sight for chipmakers.

Cue the rally in AMD (AMD), ASML N.V. (ASML), Broadcom (AVGO), Micron (MU), Nvidia (NVDA) and my often-overlooked personal fav, Taiwan Semiconductor Manufacturing (TSM).

But we’re not out of the woods yet. There’s the Federal Reserve rate decision this afternoon at 2 PM EST.

And then we’ll hear earnings from our next member of the “Magnificent 7” after the closing bell…

Ruin to Redemption

Say what you will about Meta Platforms (META), but the company knows how to pivot.

In 2022, all seemed lost for the Mark Zuckerberg infinite money-making machine. Silicon Valley’s resident robot doubled down on the “Metaverse.” Even changing the name of his empire to fit this new vision.

But Meta found itself bleeding money and only a handful of citizens in its new virtual reality. Earnings per share (EPS) cratered 55% from $3.64 in the fourth quarter of 2021 to $1.64 by the third quarter of 2022.

In turn, shares plummeted 77% from September 2021 to November 2022.

Zuck doesn’t stay flat footed though. He saw the light and shifted gears, throwing his chips in with AI, as well as launching a Twitter/X alternative, Threads. Meta AI with Llama 3 was launched and saw healthy growth across all its apps. Threads became the fastest-growing app in history, notching 100 million users in five days.

Meta’s future and fortune was salvaged from the trash heap.

Since January 2023, the social media giant’s shares have surged 286.6%!

And in the first quarter, the company’s revenue rose 27% to $36.46 billion as the number of daily active people (DAP) increased 7% to 3.24 billion. Best of all, as Meta throttled back on shoveling piles of cash into the flaming dumpster that is the Metaverse, earnings rocketed 114% higher to $4.71 per share.

Tonight, Meta will report second quarter earnings. Here’s what to expect…

Veni, Vidi, Vici

Wall Street is looking for Meta to report a 20% increase in revenue to $38.3 billion with earnings of $4.73 per share.

Well, historically, from a VertEA perspective, the second quarter has been a mixed bag for the tech giant…

Since 2012, shares have risen on this report 6 times and have fallen on this report 6 times. That’s an even 50-50 split.

But let’s see if we can sift through this a bit and look beyond the headlines.

Obviously, all eyes are going to be glued to AI spending and how that’s impacting the bottom line.

In the first quarter – historically its best-received of the year – shares tanked double digits even though revenue and earnings topped expectations, and it raised guidance for the year.

The problem? Meta raised its 2024 capital expenditures guidance 12% to $37.5 billion… all for its AI buildout.

But let’s not forget what Meta actually is… a glorified advertising company.

And anyone that has a business knows that the two gatekeepers of advertising on the internet are Alphabet (GOOGL) and Meta.

They dictate what you can and can’t say. They dictate whether your ads should be banned or not (with obnoxious assistance from AI this year). And they can shut down accounts on a whim.

Well, this is an election year in the U.S. And projections are for spending to hit new records. Keep in mind… there are only 96 days until Election Day.

That means the advertising blitz is about to go into overdrive.

Now, for comparison, Alphabet shares slipped on its second quarter results as AI spending is increasing COMBINED with YouTube ad revenue slowing. That’s creating margin pressures.

Will Meta suffer the same squeeze?

I’m not so sure.

YouTube is no longer the sole video platform. In fact, on Facebook, Instagram and Threads, Meta has been prioritizing video over anything else. It’s working to ensure creators are turning their backs on YouTube and TikTok. And a lot of companies and individuals I know have abandoned YouTube because it’s no longer profitable. Their business can’t viably operate on those platforms anymore.

Now, in the chart above, we see Meta shares rose on second quarter earnings in 2016 and 2020, our last two U.S. presidential election years. Shares did fall 11.69% on second quarter earnings in 2012. But I don’t give that move much weight as it was the first earnings report since Meta (then Facebook) went public in June 2012. First earnings reports following an IPO are almost always disastrous.

AI spending will be under the microscope tonight. But my question is, how much ad business did Meta pilfer from Alphabet and others? The long-term trend for one-day moves on this report isn’t clear… so don’t be surprised which way they turn. Though, this is an election year. And that could be the ace up Meta’s sleeve to trump its AI spending.

Knowledge is power,

Matthew