#SocialStocks: Meta Sued by Bipartisan Coalition over ‘Harmful’ Features

Third quarter earnings kickoff for the sector, Pinterest upgraded 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.

PHONE PACT: 

Lumen Technologies (LUMN) has expanded its partnership with Zoom (ZM) to create a simple, secure way for businesses to collaborate anywhere, anytime. This benefits businesses of all sizes by combining Lumen’s reliable network infrastructure and phone services with Zoom’s feature-rich cloud phone system. As part of the agreement, Lumen will provide Enhanced Local Service, Wholesale Long Distance and Wholesale Toll Free services to Zoom. This will allow Zoom to combine Lumen Public Switched Telephone Network connectivity with its cloud-based Zoom Phone offering.

FEDERAL LAWSUIT: 

California Attorney General Rob Bonta co-led a bipartisan coalition of 33 attorneys general in filing a federal lawsuit against Meta Platforms (META). Filed in the U.S. District Court for the Northern District of California, the lawsuit alleges that Meta “designed and deployed harmful features on Instagram and Facebook that addict children and teens to their mental and physical detriment.” The attorneys general are seeking injunctive and monetary relief. As part of this coordinated effort, eight attorneys general announced filing lawsuits against Meta today in their respective state courts. The federal and state complaints are the result of a nationwide investigation that Attorney General Bonta announced on November 18, 2021. Attorney General Bonta alleges that Meta violated federal and state laws, including the Children’s Online Privacy Protection Act, California’s False Advertising Law, and California’s Unfair Competition Law. States joining the federal lawsuit against Meta are Arizona, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Virginia, Washington, West Virginia, and Wisconsin. Florida is filing its own federal lawsuit in the U.S. District Court for the Middle District of Florida. They are joined by the District of Columbia, Massachusetts, Mississippi, New Hampshire, Oklahoma, Tennessee, Utah, and Vermont, which have filed related actions in state court.

MEMBERS ONLY: 

Instagram Chief Adam Mosseri said on Monday that the company is testing a new control toggle for people and a function for businesses and creators to be discovered on the platform, Jay Peters wrote for the Verge. The new Meta Verified toggle will appear as an option under ‘Following’ and ‘Favorites,” added the story. “The prominence of the toggle could make paying for Meta Verified, which costs $11.99 on the web or $14.99 in an app, a more attractive proposition,” added the Verge story.

ISRAEL-HAMAS WAR DISCUSSION: 

Meta is introducing temporary limits on “potentially unwelcome or unwanted comments” on Facebook posts about the Israel-Hamas war for users “in the region,” the company said in an update to an October 13 blog post. Meta said, “We have: Changed the default setting for who can comment on newly created public Facebook posts of people in the region to Friends and/or established followers only. Users globally can choose to use this setting and opt in or out at any time, and we are notifying people in the region with specific instructions on how to change this setting. We’ve made it easier for people to bulk delete comments on their posts. Disabled the feature that normally displays the first one or two comments under posts in Feed.”

BROADCAST CHANNELS: 

Meta plans to roll out Telegram-like broadcast channels on Facebook and Messenger in the coming weeks, after launching them on Instagram and WhatsApp this year, TechCrunch’s Aisha Malik reported. The feature lets creators and public figures share one-to-many messages to directly engage with their followers, the report notes.

NO NEWS IS GOOD NEWS: 

Google (GOOG) has let go of dozens of workers in its news division to deal with slowing growth and uncertain economic conditions, reported CNBC’s Jennifer Elias. “We’re deeply committed to a vibrant information ecosystem, and news is a part of that long term investment,” said a spokesperson for Google, noted CNBC. X, formerly Twitter (TWTR) and Meta Platforms and TikTok are also being asked for clarifications, added the story.

EARNINGS PREVIEW/RECAP: 

Meta is scheduled to report third quarter results after the market closes on Wednesday, October 25 with a conference call scheduled for 5 pm ET. In Q2, Meta Platforms reported earnings of $2.98 per share on revenue of $31.99B. Mark Zuckerberg, Meta founder and CEO, said at the time: “We had a good quarter. We continue to see strong engagement across our apps and we have the most exciting roadmap I’ve seen in a while with Llama 2, Threads, Reels, new AI products in the pipeline, and the launch of Quest 3 this fall.” The company said at that time that it expected third quarter revenue to be in a range of 32B-$34.5B, versus the then-current consensus of $31.18B. Meta added: “We anticipate our full-year 2023 total expenses will be in the range of $88-$91B, increased from our prior range of $86-$90B due to legal-related expenses recorded in the second quarter of 2023. This outlook includes approximately $4B of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We expect Reality Labs operating losses to increase year-over-year in 2023. While we are not providing a quantitative outlook beyond 2023 at this point, we expect a few factors to be drivers of total expense growth in 2024 as we continue to invest in our most compelling opportunities, including artificial intelligence and the metaverse… Looking ahead, while we will continue to refine our plans as we progress throughout this year, we currently expect total capital expenditures to grow in 2024, driven by our investments across both data centers and servers, particularly in support of our AI work.” Current EPS and revenue forecasts for Meta’s September-end quarter stand at $3.70 and $33.52B, respectively, according to data from Bloomberg.

Snap (SNAP) reported its Q3 results on Tuesday, surpassing analyst expectations in terms of EPS and revenue. Third quarter daily active users, or DAUs, were up 12% year-over-year to 406M. “Our revenue returned to positive growth in Q3, increasing 5% year-over-year and flowing through to positive adjusted EBITDA as our reprioritized cost structure demonstrated the leverage in our business model,” said Evan Spiegel, CEO. “We are focused on improving our advertising platform to drive higher return on investment for our advertising partners, and we have evolved our go-to-market efforts to better serve our partners and drive customer success.” The company’s Q4 revenue guidance fell right in line with consensus. The company commented, “As we enter Q4, we anticipate continued growth in our global community and, as a result, our financial forecast for Q4 is built on the assumption that DAU will reach 410 million to 412 million. We believe we are on the right path with our direct-response advertising platform and are focused on executing against our roadmap to deliver further improvements. That said, forward visibility of advertising demand remains limited due to several factors. First, revenue in Q4 is historically backweighted, and the revenue mix in Q4 has historically included a relatively higher share from brand advertising revenue, and brand advertising grew at a slower rate than direct-response advertising in Q3. In addition, we observed pauses in spending from a large number of primarily brand-oriented advertising campaigns immediately following the onset of the war in the Middle East, and this has been a headwind to revenue quarter-to-date. While some of these campaigns have now resumed, and the impact on our revenue has partially diminished, we continue to observe new pauses and the risk that these pauses could persist or increase in magnitude remains. Due to the unpredictable nature of war, we believe it would be imprudent to provide formal guidance for Q4. Our internal forecast assumes a revenue range of $1,320 million to $1,375 million, implying year-over-year revenue growth of approximately 2% to 6%. Within this range of revenue, we estimate that adjusted EBITDA will be between $65 million and $105 million.” Shares of Snap spiked 11%, but took a negative turn slumping 4% following the jump. Rosenblatt raised the firm’s price target on Snap and maintained a Neutral rating on the shares following a “mixed” Q3 report. Snap’s Q3 revenue and adjusted EBITDA upside was “mitigated by a slightly cautious next quarter outlook for revenues and users,” the analyst told investors in a post-earnings note.

ADDITIONAL ANALYST COMMENTARY: 

Stifel upgraded Pinterest (PINS) to Buy from Hold. Channel checks “skew more positive” and there is “still plenty of room” for growth outside the company’s domestic market, the analyst told investors in a research note. The firm said its digital advertising checks were largely positive overall, with growth that is pacing inline to ahead of internal plans exiting 2023. Stifel believes the changes Pinterest has made to its native technology, paired with the recent launch of its Amazon partnership, “are likely to bear fruit as we enter the holiday spend period.”

Evercore ISI raised the firm’s price target on Snap and kept an In Line rating on the shares following what the firm describes as “Beat & Bracket Q3 EPS results.” The analyst, who is closing the firm’s prior “Tactical Underperform” call and removing the stock from the firm’s associated list,” says DAU growth declining to “single digit percentage land does create a challenge for the Snap growth outlook,” notes the firm’s revenue estimates are largely unchanged, but its EBITDA estimates “go up materially” for FY24.

Snap’s price target was increased at Piper Sandler as the firm reaffirmed a Neutral rating on the shares following quarterly results. Shares were up slightly AH as revenue and EBITDA came in above prior estimates, the firm notes. Improvements to the ad-stack are driving strong results for SMBs & EU advertisers while larger North America continued to lag. Snapchat+ growth continues now with 5M+ paid subscribers. While Piper finds the result encouraging, EBITDA and free cash flow are still in decline year-over-year, and still awaits positive incremental margins.

Citi said Snap reported better than expected Q3 results with daily active users reaching 406M, revenue coming in 7% above consensus and EBITDA turning positive. The firm is encouraged by the improving engagement trends with Spotlight time spent up 200% year-over-year. However, it remains early days in Snap’s turnaround, the analyst told investors in a research note. It points out that the company expects slower DAU growth amid increasing penetration across its core markets while the Israel-Hamas conflict in the Middle East has caused some brands to pause spend, impacting visibility. Citi held a Neutral rating on Snap.

Seaport Research initiated coverage of ten companies within the Internet sector, including Online Advertising, eCommerce/Transaction Models, and SMB Services/Web Presence companies. The firm is constructive on the long-term growth of the sector, though revenue growth is “generally mixed,” with some companies still recovering from the pandemic and others facing tougher comps, the analyst tells investors. Many of the ten covered companies have increasingly focused on operating margins over the last 12-18 months and are beginning to see the benefits as growth stabilizes and in some cases reaccelerates, added the analyst, who sees the group being set up for outperformance going into 2024. Among the group, Seaport started Meta Platforms with a Buy rating and Pinterest with a Buy.

Stifel raised the firm’s price target on Meta and did not change its Buy rating on the shares. Ahead of earnings for the digital advertising group, the firm said its digital ads checks were “largely positive overall,” with growth that is pacing inline to ahead of internal plans as exiting the year. The firm has slightly adjusted its models, noting that some of its adjustments are based on the timing of key launches. The firm favors the names that its checks suggest are accelerating into the end of the year, so it prefers Meta, Trade Desk (TTD), and Pinterest.

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Originally Posted October 25, 2023 – #SocialStocks: Meta sued by bipartisan coalition over ‘harmful’ features