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#SocialStocks: Sprout Social quiets take-private rumors

Posted May 23, 2024 at 9:45 am
Andrew Perez
The Fly

EC opens DSA proceedings against Meta, Reddit forms pact with OpenAI 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.

SAFE AI PACT: 

Google (GOOGL), Meta (META), Microsoft (MSFT), OpenAI, Amazon (AMZN), IBM (IBM), and 10 other companies committed to safe AI development at the AI Seoul Summit 2024, hosted by South Korea and the U.K., Reuters’ Joyce Lee reported

E2EE: 

Zoom Video (ZM) announced that post-quantum end-to-end encryption, E2EE, is now globally available for Zoom Workplace, specifically Zoom Meetings, with Zoom Phone and Zoom Rooms coming soon. The launch of the new security enhancement makes Zoom the first UCaaS company to offer a post-quantum E2EE solution for video conferencing. “Since we launched end-to-end encryption for Zoom Meetings in 2020 and Zoom Phone in 2022, we have seen customers increasingly use the feature, which demonstrates how important it is for us to offer our customers a secure platform that meets their unique needs,” said Michael Adams, chief information security officer at Zoom. “With the launch of post-quantum E2EE, we are doubling down on security and providing leading-edge features for users to help protect their data. At Zoom, we continuously adapt as the security threat landscape evolves, with the goal of keeping our users protected.”

In a regulatory filing, Sprout Social (SPT) stated that on May 20, the company was made aware of an article published by Reuters concerning a potential going private transaction. “As a public company, the company receives inbound interest from time to time from various counterparties, and the company’s Board of Directors considers such interest as and when appropriate. Currently, there is no process in place to sell or take the company private,” Sprout stated. Shares of Sprout Social were down $2.68, or 8%, to $29.13 in pre-market trading on Tuesday.

ALL IN ON AI: 

Snap (SNAP) CEO Evan Speigel said he’s investing more in bringing AI and machine learning to Snapchat to make the platform more interesting for users, Alex Barinka of Bloomberg noted. “We needed to improve there and bring together some of our most senior machine learning folks to just talk about what it would look like for us to get to state of the art and really invest,” Spiegel said in an interview, according to the report.

PROBLEMATIC ADS: 

Meta approved AI-manipulated Facebook ads during India’s election that spread disinformation and incited religious violence, The Guardian’s Hannah Ellis-Petersen reported. Ads containing the AI-manipulated images were submitted to Facebook by civil and corporate accountability groups to test Meta’s mechanisms for detecting and blocking political content, according to The Guardian.

STREAMING TRUTH SOCIAL: 

Trump Media commented, “On April 16, 2024, the Company announced that after six months of testing on its Web and iOS platforms, it has finished the research and development phase of its new live TV streaming platform and will begin scaling up its own content delivery network (“CDN”). This roll out of streaming content will occur in three phases: Phase 1: Introduce Truth Social’s CDN for streaming live TV to the Truth Social app for Android, iOS, and Web. Phase 2: Release stand-alone Truth Social over-the-top (“OTT”) streaming apps for phones, tablets, and other devices. Phase 3: Release Truth Social streaming apps for home TV. In recent weeks, as part of its TV streaming initiative, TMTG signed contracts with its first data center partner to host its own TV content distribution network. The Company also signed contracts with a core hardware vendor to obtain equipment for the project.”

UNDERSEA CABLES EXPOSED: 

U.S. officials have warned telecommunication companies that undersea cables that ferry internet traffic across the Pacific ocean are vulnerable to tampering by Chinese repair ships, Dustin Volz, Drew FitzGerald, Peter Champelli, and Emma Brown of The Wall Street Journal said. State Department officials said a state-controlled Chinese company that repairs international cables are hiding its vessels’ location, which officials said defied easy explanation. Silicon Valley giants, such as Google (GOOGL) and Meta, partly own many cables and are investing in more.

NEW THREADS: 

Meta is testing column shaped Tweetdeck-like feeds to enable users to follow numerous topics, in its Threads for web, wrote Karissa Bell for Engadget. “Threads will support up to 100 different columns, though a Meta spokesperson said that number may change as the test progresses,” added the Engadget story.

CHATGPT DEAL: 

In a post on X, OpenAI stated: “We’re partnering with Reddit to bring its content to ChatGPT and new products” Shares of Reddit (RDDT) jumped 6% following the post. Citi elevated the firm’s price target on Reddit. While terms of the agreement were not disclosed, they are likely similar to Reddit’s agreement with Google, the analyst told investors in a research note. The firm believes Reddit’s dataset “is likely to become increasingly valuable.” It believes the OpenAI partnership could add $40M per year of incremental revenue for Reddit with significant flow through to profitability.

POTENTIAL DSA BREACH: 

The European Commission has opened formal proceedings to assess whether Meta, the provider of Facebook and Instagram, may have breached the Digital Services Act in areas linked to the protection of minors. The Commission said it is concerned that the systems of both Facebook and Instagram, including their algorithms, may stimulate behavioral addictions in children, as well as create so-called ‘rabbit-hole effects’. In addition, the Commission is also concerned about age-assurance and verification methods put in place by Meta. The opening of proceedings is based on a preliminary analysis of the risk assessment report sent by Meta in September 2023, Meta’s replies to the Commission’s formal requests for information, publicly available reports as well as the Commission’s own analysis. The Commission will now carry out an in-depth investigation as a matter of priority and will continue to gather evidence, for example by sending additional requests for information, conducting interviews or inspections.

EARNINGS RECAP: 

Shares of Zoom dipped lower following its first quarter earnings report on Monday. The company did beat analyst expectations, despite the marginal loss. Full-year 2025 and Q2 guidance came in right in line with analyst estimates. Zoom posted online average monthly churn of 3.2% for the first quarter. “In Q1, we continued to integrate AI across our platform including Zoom Contact Center and Zoom Workplace, our AI-powered collaboration platform that provides customers the ability to reimagine teamwork by streamlining communications, increasing employee engagement, and improving productivity within their organizations,” said Eric S. Yuan, Zoom founder, and CEO. “These innovations combined with our execution and focused investment enabled us to outperform our guidance and drive operating cash flow growth of 40.6% and free cash flow growth of 43.6% year over year.” Wells Fargo lowered the firm’s price target on Zoom Video. Zoom delivered mixed Q1 results, with strong free cash flow outperformance but growth metrics still slowing, the analyst tells investors in a research note. The firm remains cautious on underlying business trends and competition and still has questions on where the model troughs. Conversely, Citi increased the its price target on the stock. The company’s Q1 print was mixed but offered slightly more positives than negatives, especially in a backdrop of weaker small business spending, the analyst tells investors in a research note, the analyst tells investors in a research note. However, Zoom Video continues to see signs of slowing growth with further declines in customer growth, and with a softer Q2 outlook, this sets up a more aggressive guidance for the second half of 2024, said the firm.

On the other hand, Trump Media gained marginally after its Q1 results. The company reported a significantly higher adjusted EBITDA compared to last year’s mark, but noted one-time costs. The company had a first-quarter operating loss of $12.1M based on non-GAAP Adjusted EBITDA calculations. Approximately half of that amount, $6.3M, consisted of one-time payments related to the closing of TMTG’s merger with Digital World Acquisition Corp. TMTG believes it has sufficient working capital to fund operations for the foreseeable future. As of March 31, TMTG’s balance of cash and cash equivalents was $273.7M. This comprises $233.7M in unrestricted cash accounts and $40M held in restricted accounts pending the effectiveness of TMTG’s registration statement on form S-1, which was filed with the SEC on April 15. TMTG CEO Devin Nunes said, “After an unprecedented, years-long process, we have consummated our merger and dispensed with the vast bulk of merger-related expenses, leaving the Company well-capitalized and supported by a legion of retail shareholders who believe in our mission to provide a free-speech beachhead against Big Tech censorship. Having started from scratch not long ago, TMTG debuted Truth Social on the web, iOS, and Android in 2022, and is now a publicly traded company operating an international social media platform. TMTG is well-positioned at this early stage to grow quickly and fulfill our mission. Our positive working capital allows us to explore and pursue a wide array of initiatives and innovations to build out the Truth Social platform including potential mergers and acquisitions activities. We are particularly excited to move forward with live TV streaming by developing our own content delivery network, which we believe will be a major enhancement of the platform.”

ADDITIONAL ANALYST COMMENTARY: 

Demand is growing for Reddit’s “massive and unique data,” the JMP Securities noted. The firm says that with one of the largest data sets of real human interaction across 1B posts and 16B comments, spanning 19 years of conversations and organized by topic, Reddit’s platform has significant value for companies training large language models. JMP expects the OpenAI deal to be smaller than Reddit’s Google deal, which totaled $203M over three years. However, it believes there is a path to $500M for total data sales.

RBC Capital affirmed the same rating on Zoom Video while noting that the company’s Q1 results were “decent”. Zoom’s guidance was raised by less than Q1 upside and Q2 was set below consensus, leading shares down 1% after-hours, but its Q1 metrics were better than expected across the board, with acceleration in key indicators, the analyst tells investors in a research note. RBC also raises its FY25 EPS view on the stock to $5.01 from $4.86 and its FY26 view to $5.05 from $4.96.

Originally Posted May 22, 2024 – #SocialStocks: Sprout Social quiets take-private rumors

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