How the Meta Has Fallen
Meta's growth slows as competition from TikTok stiffens
Succinct Summary:
Omicron slowed economic activity for a little while but the worst appears to be behind us. Affected areas of the economy appear to be re-accelerating. The rest of the economy has stayed strong throughout the surge despite stock market volatility. Still, there are some signs that inflation and the end of stimulus is impacting lower-income consumers. In tech, Amazon and Google reported strong quarters even as Meta stumbled due to slowing growth + increased competition from TikTok.
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Macro:
Omicron caused some economic disruption
"...absenteeism due to illness is high, I mean much higher than we would normally expect to see. Now the good news is, though that we're seeing it being a spike and that people are ill and when they come back into the workforce. So, over time, we would expect this to subside and really normalize as the quarter moves on and overall." - ManpowerGroup (MAN) CEO Jonas Prising
And exacerbated inflationary pressures
"Prior to the emergence of the Omicron variant, we were experiencing some inflationary pressures and staffing issues resulting from the broader pandemic. When the Omicron surge began, inflationary costs and staffing shortages were amplified, well in excess of our expectations." - Starbucks (SBUX) CEO Kevin Johnson
But it appears that the worst is behind us
"Since mid-December, we experienced an increase in the number of people testing positive for COVID onboard our ships. The good news is that in the last several weeks, cases on board our ships have been declining rapidly, and we now have returned to exceptionally low pre-Omicron levels. In fact, over the last 7 days, we have averaged only a handful of positive guest cases per cruise -- With the declining cases, operational challenges are also abating, so while the variant is not done, it appears that the worst is behind us." - Royal Caribbean Cruise (RCL) CEO Jason Liberty
“There are signs that infection levels from the Omicron variant are declining in many places. And as such, we would expect to see death decline from their current levels as we move forward” - Reinsurance Group of America (RGA) CEO Anna Manning
The economy has remained strong despite stock market volatility
"Well, let’s talk about the economy versus the market. People are confusing the two. We have a rather strong economy. Consumers are spending 20% more than they were spending before Covid because of all the stimulus. They have a lot more money in their accounts. They can continue to spend at very high levels. Businesses are in great shape. So are consumers -- The economy is doing well in spite of Omicron, in spite of supply chains. So things are getting better -- The stock market needs a strong economy to justify its prices. Ιt is overvalued. There are sectors that are overvalued, sectors that are going to respond dramatically to higher interest rates, sectors that may be worth more than they are today. And that’s why there’s a lot of volatility; you see it now every day in the marketplace. The same thing is happening in the bond market" - JPMorgan Chase (JPM) CEO Jamie Dimon
And economic activity is re-accelerating
"With the peak in Omicron now seemingly behind us, we have seen a meaningful and sequential improvement in the booking activity week-over-week since the beginning of the year. In fact, in the last week of January, bookings returned to pre-Omicron levels, and we expect demand recovery to accelerate as the variant subsides" - Royal Caribbean Cruise (RCL) CEO Jason Liberty
The rich are still doing pretty well
"We have the strongest ever order book in our history at double-digit versus the prior years and covering well into 2023 with all regions showing significant growth." - Ferrari N.V. (RACE) CEO Benedetto Vigna
But lower-income cohorts are feeling pressured by inflation
"We had a slower than expected finish to the year and came in below our target--we’ve seen weakness around spending in our lower-income cohorts. And imagine for us, it’s – the percentage of our user base is pretty similar to what you see just like in the U.S. overall. So it is a large percentage of our user base. And this was a cohort that certainly benefited from the stimulus in prior periods earlier this year. And we’re seeing the effects of inflationary pricing around that where there is a more elastic demand curve around that. Certainly, with higher income cohorts, you’ve got a more inelastic demand curve, and that’s a lower percentage of our base." - PayPal (PYPL) CFO John Rainey
International:
There has been some divergence between the European and US economies
"I think we should be a little bit cautious about what I am hearing a lot, which is constant comparisons between the U.S. and the euro-area, the Fed and the ECB. We are really operating in different environments with different economic data. Just to give you an example, our demand here in the euro-area is pretty much back to where it was pre-COVID, in the U.S. it is 30% up. Ask yourself why? Because of this massive fiscal stimulus that the U.S. economy has had, unlike the euro area, where it has been more moderate, not excessive and which is producing the measured pace at which some factors are significantly improving." - ECB President Christine Lagarde
"More people were returning to work and changing jobs than we have seen for quite some time, resulting in more of a mass reshuffle in my view than a mass resignation. Europe’s unemployment rates are now below pre-pandemic levels and the U.S. is catching up quickly as well." - ManpowerGroup (MAN) CEO Jonas Prising
Geopolitical issues are worrying Europe
"The geopolitical clouds that we have over Europe, if they were to materialize would certainly have an impact on energy prices and through energy prices and increased cost throughout the whole structure of prices. But it would also impact growth as a result of reduced income and possibly as a result of reduced consumption and deferred investment. So the pure economic impact would certainly be significant than what we are seeing at the moment." - ECB President Christine Lagarde
International travel is progressively improving
"Travel restrictions have eased globally, and international passenger traffic continued to progressively improve, resulting in some stores reopening during the quarter, particularly in Europe and the Americas. Travel retail continues to be led by Asia/Pacific where demand from Chinese consumers remained strong." - Estée Lauder (EL) CFO Tracey Travis
Financials:
The changing landscape of wealthy clients
"You can see on how our client landscapers actually changing. Regionally most of their wealth will be created in the U.S. and then Asia-Pacific. And most of the industry revenue growth is expected to come from affluent clients and entrepreneurs. Also, a big trend is that women are increasingly garnering wealth, and they tend to be underserved in the industry. And we see a shift in needs and priorities as wealth is passing down through the generations." - UBS Group (UBS) CEO Ralph Hamers
Jamie Dimon prefers to call them crypto tokens, not cryptocurrencies
"I don’t call them cryptocurrencies, I call them crypto-tokens because currencies have rules of law behind them, central banks and tax authorities. While the valuation is there, personally I don’t understand them and I think people need to be careful and more control is needed by states. You’ve seen that in the last couple of months they have lost half their value in the US market." - JPMorgan Chase (JPM) CEO Jamie Dimon
There was a market rotation in January
"On a macro level, we saw some de-risking at year-end as investors re-balanced their strategic asset allocations amid rising inflation and the potential for higher interest rates -- The year is off to evolve a start in the equity market, with major industries down 5% to 10% across the board. While volatility may remain elevated, we are encouraged by early signs of market rotation from speculative growth to quality and value, a shift that would favor our style of fundamental research-driven active management." - Lazard (LAZ) CFO Evan Russo
Consumer:
Starbucks continues to post impressive growth
"Starbucks delivered record first-quarter revenue of $8.1 billion, representing 19% growth. Global same-store sales grew 13%, demonstrating strong customer affinity for Starbucks." - Starbucks (SBUX) CEO Kevin Johnson
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Google’s view of the future of retail will probably surprise you. Subscribe to Read
Google says that the future of retail is omnichannel
"I’ll say it again, the future of retail is omnichannel. And we continue to invest in new features and next-gen experiences so merchants and shoppers can benefit. Global searches for gift shops near me jumped 60% year-over-year in October, with searches for gifts near me up 70% in Google Maps. People increasingly want to know what’s available nearby before they get to the store." - Alphabet (GOOG) SVP & Chief Business Officer Philipp Schindler
Amazon is increasing the cost of Prime
"With the continued expansion of Prime member benefits, and the increased member usage that we’ve seen as well as the rise in wages and transportation costs, Amazon will increase the price of a Prime membership in the United States with the monthly price going from $12.99 to $14.99 and the annual membership going from $119 to $139. This is our first price increase since 2018. For new Prime members, the price change will go into effect on February 18th. For current Prime members, the new price will apply after March 25th on the date of their next renewal." - Amazon.com (AMZN) CFO Brian Olsavsky
Technology:
Google and Amazon had great quarters
"For the fourth quarter, our consolidated revenues were $75.3 billion, up 32% or up 33% in constant currency, rounding out a strong year." - Alphabet (GOOG) SVP & CFO Ruth Porat
"And AWS saw a continuation of the strong usage and revenue growth we’ve seen throughout 2021. AWS added more revenue year-over-year than any quarter in its history, and it’s now a $71 billion annualized run rate business, up from a $51 billion run rate one year ago. Even on a large base, revenue increased 40% year-over-year." - Amazon.com (AMZN) CFO Brian Olsavsky
But Meta/Facebook is facing tough competition from TikTok
"But there are two things that I want to call out that are having an impact on our business. The first is competition. People have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly. And this is why our focus on Reels is so important over the long term -- we face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there. But fundamentally, we think that there's a lot of potential for it to continue growing. It’s clear that short-form video will be an increasing part of how people consume content moving forward" - Meta Platforms (FB) CEO Mark Zuckerberg
AI will be a key tool for handling IDFA changes
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The metaverse is really just the next evolution of gaming
"What is the metaverse? Metaverse is essentially about creating games. It is about being able to put people, places, things [in] a physics engine and then having all the people, places, things in the physics engine relate to each other. You and I will be sitting on a conference room table soon with either our avatars or our holograms or even 2D surfaces with surround audio. Guess what? The place where we have been doing that forever - - is gaming. And so, the way we will even approach the system side of what we’re going to build for the metaverse is, essentially, democratize the game building -- and bring it to anybody who wants to build any space and have essentially, people, places, [and] things digitized and relating to each other with their body presence." - Microsoft (MSFT) CEO Satya Nadella
YouTube ad quarterly revenues exceed total Netflix for the second time ever
"YouTube advertising revenues of $8.6 billion were up 25%, reflecting strength in both direct response and brand advertising. The deceleration in the growth rate versus the third quarter of 2021 was driven primarily by lapping a strong recovery in the brand in the fourth quarter of 2020--YouTube Shorts continues to drive significant engagement. We just hit 5 trillion all-time views and have over 15 billion views each day globally--I think all the commerce experiences we are thinking about in YouTube is a whole additional layer of opportunity. And again, it’s another area where it all feels very early to me. We are seeing tremendous traction in YouTube across newer areas, be it podcast, gaming, learning, sports" - Alphabet (GOOG) CEO Sundar Pichai
AT&T and Verizon are behind T-Mobile on 5G. The mid-band spectrum is key.
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Industrials and Transport:
Supply chains remain a challenge
"We're -- and Stephen, here in the near term, that reflects the fact that the first 5 weeks of 2022, Omicron has remained an issue. Supply chain challenges have remained an issue, and some of our suppliers are saying, "Hey, we're pushing out deliveries, it's going to take a while to get the supply chain fully healed." - National Oil Varco (NOV) Chairman of the Board Clay Williams
"We expect supply chain impacts to remain as challenging in the first half of the year as they were in the third and fourth quarter, and they'll start to abate as the aero supply base ramps up and capacity for electronic components comes online in the third quarter. Inflation will continue to be a significant headwind." - Honeywell International (HON) CFO Gregory Lewis
Freight and logistics is a key source of inflation
"Global supply constraints continue to limit growth for our industry in the fourth quarter, resulted in elevated freight and logistic costs and drove inefficiencies in our operations negatively impacting margins. We have been experiencing supply-side challenges all year and saw a further escalation in global freight rates in the fourth quarter." - Cummins (CMI) Corporate Controller Chris Clulow
Semiconductor supply/demand may not come into balance until 2023
"After five quarters and now into the sixth quarter, there is really no line of sight to having demand/supply coming back into some form of equilibrium. So we continue to – the gap between demand and supply, despite adding supply continues to grow. We know that’s not a permanent factor, but it is at this point in time. Demand continues to be strong. Every customer I speak to, every CEO that expresses their needs continues to see strength in their business. It’s, in fact, many, many of them wanting to go into something more of non-cancelable nature into ‘23, in many cases, into ‘24 as they see their business. So there are many, many factors driving semiconductor growth beyond the short-term supply/demand. There are secular factors that we’ve talked about with the megatrends, with how digitization is taking place. At some point, it will have a supply/demand balance that does occur. We don’t see it in ‘22. We don’t see it in our numbers that we see for ‘23 at this point." - Microchip Technology (MCHP) CEO Ganesh Moorthy
There may be some signs of improvement though
"Talking about the challenges for the industry semiconductors remains a big problem because it is improving quarter four as compared to quarter two, quarter three but cannot still unleash the full demand potentially." - Tata Motors (TTM) President, Passenger and Electric Vehicle Business Shailesh Chandra
"We saw improved semiconductor availability in the fourth quarter compared to the third quarter, which enabled us to increase our wholesale sequentially while substantially reducing our inventory of vehicles built without certain components, and we expect ongoing semiconductor availability improvements throughout 2022." - General Motors (GM) CFO Paul Jacobson
The EV market remains strong
"Critical electronic part outlook as I said better, EV demand remains strong. We have the highest pending booking in terms of number of leads I will say still and we are very fast ramping of the supplies." - Tata Motors (TTM) President, Passenger and Electric Vehicle Business Shailesh Chandra
"Even with the recent momentum, I know some observers may remain skeptical that a 118-year-old company like Ford will emerge as a winner in these disruptive times in our industry. And I'm okay with that. We're going to compete like a challenger, speak with our actions, prove ourselves over time. Now to deliver these things, we're building new muscles and that certainly includes scaling up our production of electric vehicles as I mentioned. We under-called the demand for our first wave of EVs. The Mustang Mach-E, the E-Transit, the F-150 Lightning. In the past six months, we doubled our 2023 planned capacity for EVs to 600,000 units a year." - Ford (F) CEO Jim Farley
Materials & Energy:
The energy sector was the best performing sector in the S&P 500 for 2021
"...very importantly, I believe, investors are starting to realize that the energy transition is going to be longer and much more complicated than many originally believed. In short, I think the recognition is now beginning to be out there, that there's a long runway for fossil fuels and for natural gas in particular. Now, talk is always cheap. The real proof for my thesis, I believe, is that the energy sector was the best-performing sector in the S&P 500 for 2021, and that trend is continuing during the first few weeks of this year despite pretty dismal performance in the overall market that we're all witnessing." - Kinder Morgan (KMI) Executive Chairman of the Board Richard Kinder
Kinder Morgan has a 10% FCF yield
"....the average free cash flow yields for 2022 estimates is highest for Energy beyond any other segment of the S&P 500. And then, if you go to the right-hand part of this slide, you can see where Kinder Morgan fits in. This is based again on 22 consensus estimates, which would show a free cash flow yield of 10% for Kinder Morgan for 2022--so in essence, if you look at Kinder Morgan as a story, it's a story of optionality and you're getting paid very healthy and well-covered dividends while we explore and take advantage of those options that have become very apparent to us" - Kinder Morgan (KMI) Executive Chairman of the Board Richard Kinder
There’s a tightening supply and demand gap for oil
"The world is facing a tightening supply and demand gap for energy after years of underinvestment and current global activity levels are insufficient to bridge that gap. Commodity markets are waking up to the fact that the world consumed a 1 billion-barrel inventory overhang that we generated during the lockdown of 2020 in less than 15 months." - National Oil Varco (NOV) Chairman of the Board Clay Williams
Oil and gas may be here to stay for a while
"Oil and gas is still the industry that fuels all other industries. The urgency to address the lack of investment in this space will grow from here--Despite the temporary unfavorable mix shift as customers begin to better understand lead times in this new world, we're seeing a meaningful pickup in both land and offshore tendering activity for larger premium pipe" - National Oil Varco (NOV) Chairman of the Board Clay Williams
Some commodity prices have shown signs of peaking
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Nuggets of Wisdom:
Management teams with large ownership create incentive alignment with shareholders
"As most of you know, my brothers and sisters and I own roughly 25% of the Company. As part of our recent meeting with our advisers, we discussed the financial return on the family's investment since the merger of Scotts and Miracle-Gro in 1994. Just like other long-term shareholders, we've done well. The most important part of the discussion; however, was centered around the simple question, why? Why have we done so well? And that's the part of the story that matters to all shareholders. One of the benefits, I believe, from strong family ownership in a public company is that we take a long-term view, and we're not afraid to think like an activist and recognize the need to re-imagine the Company from time to time." - Scotts Miracle-Gro (SMG) CEO Jim Hagedorn