#SocialStocks: First quarter earnings kicks off

EC brings proceedings to assess Meta compliance with Digital Services Act, Trump Media calls on shareholders and other notable stories from this week

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

I AM BATMAN: 

Meta (META) announced that Warner Bros. Interactive’s (WBD) upcoming virtual reality game “Batman: Arkham Shadow” will be a Meta Quest 3 exclusive title, with the game set for release in late 2024. The company added that the official reveal of the game will occur at Summer Game Fest 2024 on June 7.

EUROPEAN SCRUTINY: 

On Tuesday, the European Commission announced that it opened formal proceedings to assess whether Meta, the provider of Facebook and Instagram, may have breached the Digital Services Act. The suspected infringements cover Meta’s policies and practices relating to deceptive advertising and political content on its services. They also concern the non-availability of an effective third-party real-time civic discourse and election-monitoring tool ahead of the elections to the European Parliament, against the background of Meta’s deprecation of its real-time public insights tool CrowdTangle without an adequate replacement. Further, the Commission suspects that the mechanism for flagging illegal content on the services as well as the user redress and internal complaint-mechanisms are not compliant with the requirements of the Digital Services Act and that there are shortcomings in Meta’s provision of access to publicly available data to researchers. After the formal opening of proceedings, the Commission will continue to gather evidence, for example by sending additional requests for information, conducting interviews or inspections.

This came after The Financial Times’ Javier Espinoza initially noted Facebook and Instagram are set to be probed by the EU over concerns the social media giant is failing to do enough to counter disinformation from Russia and other countries. According to two people with knowledge of the matter, regulators believe Meta’s moderation does not go far enough to stop the widespread dissemination of political advertising that risks undermining the electoral process, and EU officials are particularly worried about the way Meta’s platforms are handling Russia’s efforts to undermine upcoming European elections.

WINNING: 

In its Q1 investor letter, a copy of which was obtained by The Fly, Third Point stated: During the First Quarter, Third Point returned 7.8% in the flagship Offshore Fund. The top five winners for the quarter were Meta, Vistra (VST), Amazon.com (AMZN), Bath & Body Works (BBWI) and Microsoft (MSFT).

LAYOFFS: 

Meta’s Oversight Board is preparing to make some job cuts, The Washington Post’s Naomi Nix reported. The independent oversight body last week told some employees that their jobs were at risk of being cut, according to people familiar with the matter. The cuts are expected to affect staff who support the 22 experts, such as academics and lawyers, who make decisions about content moderation on Facebook, Instagram and Threads, Nix wrote. 

FIRST DRAFT: 

Meta has made its Meta AI software available across its social media platforms, with the feature appearing in Facebook’s news feed, Instagram’s search bar, and in conversations on Messenger, Scott Nover of Fast Company reported. While the experience was meant to improve user experience, so far, the addition has been a “spam-filled” experience, the journal said. The Instagram search bar now pushes you to converse with the AI model instead of searching the platform and the AI model has replied to posts on Facebook acting as though it was human.

RECALLING SHARES: 

Trump Media (DJT) said it is highlighting actions DJT shareholders can take to prevent the lending of their shares by brokerage firms for the purpose of short selling. The company commented, “The company’s shareholder base primarily consists of retail investors who hold their shares through various brokerage firms. Many of these retail shareholders invested in DJT because they support TMTG’s mission to create a free-speech beachhead against Big Tech censorship. TMTG wants to clarify that if shares are currently on loan by brokerage firms to facilitate short selling, shareholders have the option of asking their broker to recall their shares. After recalling their shares, long-term shareholders who believe in the company’s future can then hold their DJT shares in a cash account, opt out of any securities lending programs, or move their shares to a Direct Registration account at the company’s transfer agent, Odyssey Transfer & Trust Company.”

CHUNK OF CHANGE: 

Microsoft, Meta, and Alphabet (GOOGL) disclosed last week that they had spent more than $32B combined on data centers and other capital expenses in Q1, as they accelerate AI spending, The New York Times’ Karen Weise wrote. The companies all said in calls with investors that they had no plans to slow down their AI spending,

TIKTOK LATEST: 

ByteDance is exploring scenarios for selling a majority stake in TikTok US, preferably to a non-tech company, and without the recommendation algorithm, The Information’s Erin Woo, Qianer Liu and Juro Osawa noted, citing three people with knowledge of the discussions.

ByteDance would prefer shutting down TikTok rather than sell it should the company exhaust all legal options to fight legislation to ban the platform from app stores in the U.S., Kane Wu and Julie Zhu of Reuters reported, citing four sources. The algorithms TikTok relies on for its operations are deemed core to ByteDance’s overall operations, which would make a sale of the app with algorithms highly unlikely, sources close to ByteDance told Reuters. TikTok accounts for a small share of ByteDance’s total revenue and daily active users, so the parent would rather have the app shut down in the U.S. in a worst case scenario than sell it to a potential American buyer, the people said.

EARNINGS RECAP: 

Going back to last week, Meta kicked off first quarter earnings for the sector on Wednesday. Despite Q1 results coming in ahead of expectations and Q2 guidance in line with consensus, shares of the company fell double digits in the report’s wake. The social media giant elevated its capital expenditures view, citing AI-related costs. “We anticipate our full-year 2024 capital expenditures will be in the range of $35-40B, increased from our prior range of $30-37B as we continue to accelerate our infrastructure investments to support our artificial intelligence roadmap. While we are not providing guidance for years beyond 2024, we expect capital expenditures will continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts. Absent any changes to our tax landscape, we expect our full-year 2024 tax rate to be in the mid-teens. In addition, we continue to monitor an active regulatory landscape, including the increasing legal and regulatory headwinds in the EU and the U.S. that could significantly impact our business and our financial results. Q1 was a good start to the year. We’re seeing strong momentum within our Family of Apps and are making important progress on our longer-term AI and Reality Labs initiatives that have the potential to transform the way people interact with our services over the coming years.” Wedbush lowered the firm’s price target on Meta. The firm noted Meta reported Q1 revenue and operating income ahead of Street estimates by 1% and 5%, respectively. Despite healthy Q1 results and Q2 revenue guidance that was roughly in line with consensus, shares were after-hours reflecting elevated investor expectations given strong digital ad trends in Q1, 2024 expense and capex guidance higher than the Street anticipated, and commentary from management indicating that the company is in the early stages of a multi-year investment cycle to support metaverse and AI initiatives that will likely take several years to scale adoption and monetization, Wedbush added.

Shares of Snap (SNAP), on the other hand, surged 25% after the company beat estimates in its first quarter release. Snap also issued second quarter revenue guidance outpacing expectations on the back of Q2 daily active users, or DAU, target of 431M. The company said, “As we enter Q2, we anticipate continued growth of our global community, and as a result, our Q2 guidance is built on the assumption that DAU will be approximately 431 million in Q2. We are focused on executing against our roadmap to deliver improvements to our DR advertising platform to drive improved results for our advertising partners and accelerate topline growth. Our Q2 guidance range for revenue is $1,225 million to $1,255 million, implying year-over-year revenue growth of 15% to 18%. Given the revenue range above, and our investment plans for the quarter ahead, we estimate that Adjusted EBITDA will be between $15 million and $45 million in Q2.” HSBC double upgraded Snap to Buy from Reduce with a price target of $15.10, up from $10. The company reported a strong set of Q1 results, marked by return of double-digit growth, the analyst told investors in a research note. The firm has turned positive on the outlook for Snap as its sales growth accelerates and newer products gain traction. Progress being made in Snap shifting away from being overly reliant on brand awareness advertising, contends HSBC. The firm sees a broad-based recovery in global advertising demand and pricing and adds Snap’s direct-response ad solutions are gaining traction.

Pinterest (PINS) also ascended double digits following its Q1 report, rising almost 17%. Global monthly active users increased 12% year over year to 518M. “Q1 was a milestone quarter for Pinterest as we reached new highs: surpassing half a billion monthly active users and reporting 23% revenue growth – our fastest user and revenue growth since 2021,” said Bill Ready, CEO of Pinterest. “Thanks to our investments in AI and shoppability, we’re driving even greater returns for advertisers and gaining access to performance budgets. We’re executing with tremendous clarity and focus, shipping new products and experiences that users want, and in doing so, we’re finding our best product market fit in years.” RBC Capital increased its price target on Pinterest. The company reported a “breakout quarter” with upside in revenue and EBITDA for Q1 and Q2 outlook, the analyst told investors. Pinterest’s direct links are working, with advertisers spending more as they see better return on ad spend, or ROAS, RBC contended.

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Originally Posted May 1, 2024 – #SocialStocks: First quarter earnings kicks off