Week 5: Earnings Week Frenzy
Zuckerberg is focused on making Meta more efficient; Amazon's shares tumbled as its cloud business experienced a slowdown; Positive labor market news left the investors worried about future rate hikes
💡Did you know? With a market cap of $2.45 trillion, Apple is more valuable than 97% of the world’s economies, with the exception of the US, China, Japan, Germany, India, the UK, and France.
Market Rundown
Meta: Regaining pole position?
📝Quick Recap
Meta’s shares jumped 23% after the firm reported positive news — Q4 revenue ($32.17 billion) beat the market’s expectations. More importantly, the market reacted positively to Zuckerberg’s new mantra — “2023 is the year of efficiency” — as he set out to reduce costs wherever possible, helping him regain investors’ trust.
🤓Analyze like a Consultant
In my earlier piece, I talked in depth about how Meta should focus on two areas to regain its position in the digital ads space:
1) Improve Reels monetization
2) Monetize its core product offering via click-to-messaging ads
Hence, in this section, I will briefly analyze Meta's progress in these two areas, helping us better understand the company's outlook as it heads into 2023.
Reels monetization showing signs of recovery:
“Currently, the monetization efficiency of Reels is much less than feed, so the more that Reels grows, even though it adds engagement to the system overall, it takes some time away from feed and we actually lose money. But people want to see more Reels though, and the key to unlocking that is improving our monetization efficiency so that we can show more Reels without losing increasing amounts of money” — Meta
Boosting Reels monetization depends on both demand and supply forces.
Supply-side: Let's think about it. Meta not only needs users to watch reels but also to spend a significant amount of time on Reels, incentivizing marketers to increasingly promote ads via this channel.
Meta has made significant progress driving user engagement on its FB and IG reels, thanks to large investments into better content recommendation algorithms last year. For instance, IG and FB reels now contribute to 30% of total engagement across Meta's products and are expected to reach 40% by the end of this year -- great news!
Demand-side: I am surprised by Meta's quick turnaround in boosting the demand for its Reel ads. In fact, 40% of Meta's advertisers use Reels to push ads, an incredible feat achieved in just 2 years.
What has been driving this change? Well, there are two factors.
Since Apple's privacy policy change, Meta has focused on enhancing its ad-targeting capabilities via large-scale AI investments. This way, Meta can help serve users more relevant content and ads. In fact, advertisers have seen 20% more ad conversions this year compared to last year, reaffirming the idea that the company is headed in the right direction.
In my Meta piece, I talked extensively about the need for Meta to lower the barrier to advertising via Reels -- reel ads are more expensive to produce as marketers have to invest in creating videos instead of just putting a photo ad on stories/feeds. Nevertheless, Meta has greatly reduced these barriers by offering advertisers more formats, objectives, and tools to create them on Meta's platform.
Click-to-message ads: Meta dominates the messaging landscape, so it is only logical for the firm to double down and monetize this advantage. Meta's click-to-message product shows excellent potential with a $10 billion annual run rate (compared to the $9 billion forecasted last year), contributing ~8% to the company's overall revenue. More importantly, over half of the click-to-message advertisers use the product exclusively on Meta.
What do all these tell us?
Well, click-to-message is a highly sticky product, considering how it enables businesses to connect with the consumer directly and drive conversion. Hence, it would be interesting to see if Meta is able to continuously scale this product, especially in emerging markets (e.g., India) where WhatsApp has a strong foothold in the messaging landscape.
🤷♂️What does it mean for investors?
There are two reasons why investors should be optimistic about Meta’s performance.
First, Zuckerberg has toned down his narrative about the Metaverse and is now focusing on improving his core business’ cost base, which is the right move amidst a broader economic decline. In other words, the company is cutting down its investments in the Metaverse, which has been nothing short of a failure.
Second, Meta is realizing returns on its investments last year in the form of better ad conversion rates and user engagement. Yes, the overall ad industry is taking a hit this year, which will negatively affect Meta’s revenue in the short term. But, Meta is strengthening its core business rapidly and building exciting avenues for future growth (via its click-to-message ads), developments that will allow it to retain its pole position in the digital ads space.
Amazon: Trouble in Paradise
📝Quick Recap
Amazon beat its revenue expectations but missed its earnings target. As a result, its shares declined by 3% after trading hours.
What contributed to this decline?
Amazon's AWS segment reported a slowdown in growth. AWS' revenue grew 20% yoy to $21.4 billion compared to a 40% yoy growth rate in 2021.
Why is this happening?
As business slows down, companies are reducing their cloud spending expenses. In other words, you don't need to pay $1000 for 100 GB of storage when now you can make do with 70 GB of storage.
Likely outcome:
This year, the trend of re-rating tech stocks will continue as they fall from their exuberant, pandemic-fueled highs. Amazon is no exception. The firm trades an extremely high multiple (92x P/E), and I expect that multiple to take a hit as the business starts to slow this year, especially in the AWS and digital advertisement segments.
The labor market is sticking out like a sore thumb
📝Quick Recap
The recent job market report showed an addition of 517,000 jobs, driven primarily by the hospitality, retail, and healthcare sectors. Average hourly earnings grew at a lower rate compared to December (4.4% vs. 4.8%).
Despite the positive news, the market reacted negatively. Why?
Well, positive labor market news indicates that the economy is still growing, and the skyrocketing inflation is still boosting wages. As a result, the market expects the Fed to implement interest rate hikes at least two times this year instead of just once more. These rate hikes will further dampen the economy and negatively impact the stock markets.
🗒Weekly Headline Summary
Asia-Specific
Indonesia’s Fastest Expansion in Nine Years Faces New Risks|BB
Adani Plans $1.1 Billion Loan Repayment After Share Collateral Plummets|WSJ
Hopes for China's economic reopening buoy Asian currencies|NK
Investors snap up Wanda bonds in bet on China property revival|FT
Beyond Asia
U.S. Car Makers’ EV Plans Hinge on Made-in-America Batteries|WSJ
Apple forecasts another drop in revenue, proclaims iPhone production problems over|RT
Ford Slides as CEO Says $2 Billion Profit Left ‘on Table’|BB
US blue-chips set for first profit drop since Covid crisis|FT