#SocialStocks: Buyout Trial Pushed Back as Musk and Twitter Look Towards Deal

Meta outlines vision for metaverse at Meta Connect, FTC pares Meta lawsuit 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.

TO BAN OR NOT TO BAN: 

Twitter (TWTR) is reviewing its policies around permanently banning users, assessing whether there are other content moderation tools that could replace the permanent ban, its harshest penalty for the violation of certain rules, The Financial Times’ Hannah Murphy reported. Any change is unlikely to pave the way for a return to the platform for Donald Trump, as removing bans for breaching its policy against inciting violence is not under consideration, two people familiar with the situation said. A relaxation of the policy has been touted by Tesla (TSLA) CEO Elon Musk, who plans to buy Twitter for $44B.

Earlier this week Twitter locked Kanye West’s account for violating the company’s policies after the rapper tweeted he would go “death con 3 On JEWISH PEOPLE”, adding “You guys have toyed with me and tried to black ball anyone whoever opposes your agenda”, the New York Times’ Stuart Thompson reports, citing a company spokeswoman. West, who also accused Meta (META) CEO Mark Zuckerberg of removing him from Instagram, had his account restricted on the photo-sharing platform on Friday after he suggested Sean ‘Diddy’ Combs was being controlled by Jewish people.

THE FUTURE OF VR AND THE METAVERSE: 

Meta unveiled Meta Quest Pro, a new all-in-one virtual reality headset. “Meta Quest Pro is the first entry in our new high-end line of devices, and it’s packed with innovative features like high-res sensors for robust mixed reality experiences, crisp LCD displays for sharp visuals, a completely new and sleeker design, plus eye tracking and Natural Facial Expressions to help your avatar reflect you more naturally in VR,” the company said. Meta Quest Pro will be available for purchase on October 25 for $1,499.99 USD, and that includes the headset, Meta Quest Touch Pro controllers, stylus tips, partial light blockers, and a charging dock. You can pre-order Meta Quest Pro from the Meta Store starting today in any country where Meta Quest products are supported, and from select retail partners, including: Best Buy in the US and Canada, Argos and Currys in the UK, and FNAC and Boulanger in France. You can also pre-order from Amazon in the US, UK, Canada, and France. The Meta Quest line of devices will continue to exist alongside Meta Quest Pro as an accessible entry point for VR, and there’s a ton of content and updates still planned for Meta Quest 2, Meta said.

Meta also announced a number of new games coming to its Quest 2 virtual reality headset, including “Marvel’s Iron Man VR,” “Among Us VR,” “The Walking Dead: Saints & Sinners – Chapter 2: Retribution,” as well as Xbox Cloud Gaming (MSFT) integration. Meta noted during its Connect event that “Iron Man VR” studio Camouflaj recently joined Oculus Studios, as did “Path of the Warrior” studio Twisted Pixel and “Resident Evil 4 VR” developer Armature Studio.

Additionally, the company said that Xbox Cloud Gaming (MSFT) is coming to the Meta Quest Store. “Xbox Cloud Gaming enables you to stream hundreds of high-quality games to a range of devices-and that will include Meta Quest 2 in the future,” Meta said. “When Xbox Cloud Gaming launches on the Meta Quest Store, you’ll be able to hook up an Xbox controller to your headset and play console games from the Xbox Game Pass Ultimate library on a massive 2D screen, like having a private movie theater available at all times. No date yet, but we hope to share more on this as soon as possible.”

Jeff Teper, President – Microsoft Collaborative Apps and Platforms, said in a post to the Microsoft (MSFT) blog: “Over the past two-and-a-half years, new patterns of work have emerged that put people, communications, and workflows at the center. In that time, Microsoft Teams has grown to 270 million monthly active users, becoming the most ubiquitous platform for workplace collaboration and business processes. Teams’ growth is a sign of how work has changed, and where it’s going… As a platform company, our approach to workplace productivity and collaboration is to ensure the software experiences we deliver can benefit users on all their favorite devices. In that spirit, today we are announcing several ways we are partnering with Meta to provide customers with more choice and security as they venture into the metaverse. First, we are bringing Mesh for Microsoft Teams to Meta Quest devices. Mesh for Teams builds on years of research and Microsoft Cloud innovation, from Azure Digital Twins to Dynamics 365 Remote Assist and Teams video meetings. It is designed to help people gather virtually in the place where work happens on any device, including smartphones, laptops and mixed-reality headsets. Mesh for Teams with Meta Quest Pro and Meta Quest 2 devices will enable people to connect and collaborate as though they are together in person. In addition, Microsoft 365 apps will be available on Meta Quest devices, enabling people to interact with content from their favorite productivity apps including Word, Excel, PowerPoint, Outlook, and SharePoint within VR. In the future, Windows 365 will also be available on Meta Quest devices, with the ability to stream a Windows Cloud PC including your personalized apps, content and settings. Microsoft Intune and Azure Active Directory will support Meta Quest Pro and Meta Quest 2, enabling IT administrators to provision these devices for users with a Quest for Business subscription from Meta, with confidence so that the security and management options they expect from PCs and mobile devices will carry over to VR. Finally, Microsoft and Meta are exploring ways to bring Xbox Cloud Gaming to Meta Quest Store, allowing gamers to stream hundreds of high-quality Xbox games to phones, tablets, PCs, select smart TVs, and the Meta Quest platform. This partnership complements our commitment to HoloLens, and we are excited to continue evolving our mixed-reality devices roadmap, leading with our cloud-first approach, and with Windows and Microsoft 365 at the fore.”

NBCUniversal (CMCSA) is partnering with to bring VR experiences to Quest headsets in 2023, TechCrunch’s Amanda Silberling reported. “Starting next year, Meta and NBCU will co-create experiences around The Office, Universal Monsters, DreamWorks, Blumhouse, Halloween Horror Nights and so much more,” said Vishal Shah, Meta’s VP of Metaverse, at the Meta Connect event.

Meta Platform’s virtual social network Horizon Worlds, which is set to serve as the company’s main “metaverse” app, is suffering from a litany of quality issues, and the team making it isn’t even entering the virtual world very much, The Verge’s Alex Heath reported, citing internal memos. In one of the memos to staff dated September 15, Meta’s Metaverse VP Vishal Shah said the team would continue to be in “quality lockdown” for the remainder of 2022 in order to “ensure that we fix our quality gaps and performance issues before we open up Horizon to more users,” the author said.

AUGMENTED REALITY SHOPPING: 

Disguise Inc., subsidiary of Jakks Pacific (JAKK), with Snap (SNAP) announced the launch of an AR shopping experience for Halloween costumes on Snapchat featuring Disguise’s 2022 line. Snapchatters can try-on, share with friends, and buy costumes of their favorite characters.

ANTITRUST LAWSUIT CURTAILED: 

The FTC is paring back a lawsuit seeking to block Meta’s purchase of Within Unlimited, the creator of he virtual-reality fitness game Supernatural, The Wall Street Journal’s Dave Michaels reported earlier this week. The FTC dismissed claims against CEO Mark Zuckerberg in August, and has now also backed away from alleging the deal would undermine existing competition between Meta and Within, according to a court filing.

TWITTER BUYOUT: 

Sequoia Capital and cryptocurrency exchange Binance, both of which are major equity investors backing Musk’s agreement to acquire Twitter, intend to proceed with their funding, The Information’s Erin Woo, Kate Clark, and Aidan Ryan reported. Sequoia is investing $800M in the deal, intends to keep its funding in place, while Binance is slated to contribute $500M, the authors noted.

Elon Musk plans to buy Twitter for $44B, the original price he agreed to back in April, Connor Smith wrote in this week’s edition of Barron’s. When Musk proposed buying Twitter for that $54.20 price, some observers wondered if Twitter would even accept the offer. Twitter stock traded at $39 on April 1, the Friday before Musk disclosed a stake in the social-media firm, but shares had traded as high as $68 in October 2021. Now it looks like Twitter shareholders are getting the favorable deal, with Musk overpaying by a large sum, the author noted. Since Musk disclosed his Twitter stake-the start of his takeover journey-the S&P 500 has fallen nearly 17%. The sharp declines have followed pullbacks in advertiser sentiment as brands react to a worsening macroeconomic environment. Rising interest rates, inflation, and the war in Ukraine have also weighed on companies broadly, the publication adds. At the deal price, Musk is paying nearly eight times the amount of revenue Twitter is expected to generate over the next 12 months. That compares with a sales multiple of just three times for Meta and 3.6 times for Snap (SNAP), the author wrote.

Twitter said it looks forward to closing its buyout deal with Musk by October 28 at $54.20 per share, according to Bloomberg. Reportedly, a Delaware judge said that Elon Musk will have to close the transaction by 5:00 pm on October 28. This report came shortly adter Twitter said that Musk “can and should” close their proposed buyout agreement next week and that the billionaire should be arranging closing on October 10, according to Bloomberg. The social media giant said that Musk is refusing to commit to any closing date, the report stated

Financial Times’ Hannah Murphy and Sujeet Indap initially reported on Thursday that Musk requested that a Delaware judge halt his legal battle with Twitter, accusing the company of “not taking yes for an answer” as he tries to finalize his proposed $44B takeover of the social media giant. Musk proposed acquiring Twitter at the originally agreed price of $54.20 per share, on the condition that litigation over his previous efforts to terminate the deal is stayed, the authors noted. The billionaire’s lawyers said in a court filing that the debt financing parties were “working cooperatively to fund the close” of the transaction, which they anticipate will occur “on or around October 28, the authors said.

Banks that agreed to fund Musk’s takeover are facing the possibility of big losses now that the billionaire has shifted course and indicated a willingness to follow through with the deal, The Wall Street Journal’s Alexander Saeedy, Laura Cooper, and Ben Dummett reported. The $44B deal, which Musk had been trying to walk away from, would be paid for in part with some $13B of debt seven banks including Morgan Stanley (MS), Bank of America (BAC) and Barclays (BCS) agreed to provide when the takeover was sealed in April, the authors noted. As is typical in leveraged buyouts, the banks planned to unload the debt rather than hold it on their books, but a decline in markets since April means that if they did so now they would be on the hook for losses that could run into the hundreds of millions, according to people familiar with the matter.

COMPROMISED: 

Meta said it has identified more than 400 malicious Android and iOS apps this year that target people across the internet to steal their Facebook login information. These apps were listed on the Google Play Store and Apple’s App Store and disguised as photo editors, games, VPN services, business apps and other utilities to trick people into downloading them. “We reported our findings to Apple (AAPL) and Google (GOOGL) and are helping potentially impacted people to learn more about how to stay safe and secure their accounts,” Meta said. The company noted it intends to notify about 1M Facebook users that their account information may have been compromised as a result. 

STOLEN ACCOUNTS: 

Meta has sued companies doing business as “HeyMods,” “Highlight Mobi” and “HeyWhatsApp” for stealing over a million accounts using unofficial WhatsApp Android apps, Bleeping Computer ‘s Sergiu Gatlan reported. The malware-infested apps were available on several APK sites and even the Google Play Store, according to the complaint.

ANALYST COMMENTARY: 

Atlantic Equities analyst James Cordwell downgraded Meta Platforms. The analyst now believes Meta’s growth outlook is “increasingly challenged” given strengthening macro headwinds, rising competition for advertising dollars and his analysis suggesting that secular tailwinds in digital advertising are set to ease. Given high decremental margins and greater challenges reducing costs than anticipated, Meta faces ongoing downside risk to earnings, Cordwell told investors in a research note.

Morgan Stanley analyst Meta Marshall downgraded Zoom Video Communications. The analyst sees a lack of near-term catalysts for the shares. Zoom’s online business is not expected to stabilize until early next year, creating an “overhang” that is likely to remain on the stock for the next six months.

JPMorgan analyst Mark Murphy also downgraded Zoom Video, after assuming coverage of the name. The analyst is positive on Zoom’s “underlying technology, continued innovation, and market position,” and is “impressed” by its cash-generative financial profile. However, these are offset by near-term growth and margin headwinds as Zoom pivots to optimize business mix and ramps spending to explore new avenues of growth as well as address competitive evolution, Murphy noted. He believes in Zoom’s platform and long-term vision, but says this is balanced by execution risk, a contract renewal cycle “that may occur during a time of tightening budgets and evolving competitive landscape in a slowing macroeconomic climate.”

KeyBanc analyst Justin Patterson noted that after outlining its metaverse vision in 2021, Meta showed more of its product slate at Meta Connect 2022, and that partnerships play a key role in platform development. The near-term challenges the analyst see include metaverse likely to remain a decade-long investment, and a chicken/egg dynamic between user growth and compelling content that remains. While the Quest Pro has an impressive feature set, he struggles to see adoption at a $1,499 price point and with limited battery life. In short, Patterson continues to view metaverse discussions as a sidebar to the core debates. Specifically, he believes Meta’s fundamental performance continues to center on underlying engagement, ad cycle sensitivity, whether AdTech investments are beginning to bear fruit around measurement improvements, and how management is sizing opex and capex investments.

Credit Suisse analyst Stephen Ju lowered the firm’s price target on Meta Platforms. The analyst also decreased his estimates for the second half of 2022 and 2023 – former is due primarily to FX, while on the latter he elects to take a more conservative stance as his conversations with advertisers for online/digital budget growth indications for the next year are decelerating sharply to mid-single-digits. His checks indicate largely in-line Q3 ad spend and indications for Q4 appear stable to slightly higher.

Ju also lowered the firm’s price target on Snap. His more recent checks point to improving quarter-over-quarter digital ad trends for Q3 versus Q2, although many of the verticals where Snap has the greatest exposure underperformed the broader online ad environment during the quarter while others continue to be impacted by inflation/supply chain. That said, his primary concerns for Snap are not necessarily the second half of 2022 but rather 2023, as the initial indications for aggregate online/digital budget growth are for a sharp deceleration down to mid-single-digits and further that the current advertiser behavior to conservatively rotate budgets into larger platforms is likely to remain the norm given macro uncertainties.

Based on tracking of ads on IG Reels, Meta Platforms’ monetization is ramping as the data suggests ad loads reached 14% in September compared to 8% in July and initial ad exposure is now earlier in the experience, Citi analyst Ronald Josey tells investors in a research note. The analyst recognizes “it remains early days” in Reels monetization and the challenges in engagement given the competition in short-form-video, but he also believes Reels “could have naturally higher” ad loads over time. He’s encouraged with Meta’s newer ad formats announced earlier this week and reiterated a Buy rating on the shares with a $222 price target. Josey sees a “compelling” risk/reward in the shares.

Wedbush analyst Daniel Ives noted that it has been “a wild 24 hours” for the Twitter/Musk saga with the deal now green lighted from the Musk camp at the original $44 billion/$54.20 price tag. The Street and Musk are now waiting patiently for the Twitter camp now to officially reach an agreement to end their litigation in Delaware and clear the path for this deal to get inked possibly by next week, the analyst adds. Front and center here could be the condition out of the Musk agreement that the deal closing was pending the receipt of the necessary $12.5 billion debt financing, Ives argues. The analyst points out that the banks are essentially cemented to this Twitter debt deal and sees no way out despite the very tough debt markets today. The recent Citrix debt deal has clearly made investors nervous, but Ives does not see this debt situation falling apart and thus giving Musk “a way out” of the Twitter deal with a minimal breakup fee despite the noise.

Goldman Sachs analyst Eric Sheridan upgraded Pinterest. Although digital advertising landscape remains mired in “uncertain times”, he is turning more positive on improved user growth and engagement trends for the company over the short and medium term, the analyst tells investors in a research note. Sheridan adds that he sees potential for upside to revenue growth trajectory and operating margin estimates moving into 2023/2024, stating that his recent analysis boosts his confidence in Pinterest’s ability to grow monetization and capture a greater share of ad budgets as the company executes against its shopping and commerce opportunity. The analyst also sees Pinterest being “positively levered” to long-term secular growth themes such as ad spend shifting online, social commerce, and creator economy over the long term.

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Originally Posted October 12, 2022 – #SocialStocks: Buyout trial pushed back as Musk and Twitter look towards deal