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Facebook, Spotify Shares Hammered After Poor Earnings, Snap Soars

Facebook, Spotify Shares Hammered After Poor Earnings, Snap Soars

Earnings season is well and truly underway, with 56% of S&P 500 companies having reported fourth-quarter 2021 earnings. According to FactSet data, 76% of those companies have reported actual EPS above estimates while 77% have reported a positive revenue surprise. The top-performing sectors in terms of earnings growth are energy (N/A), industrials (+90.4%), materials (+59.3%), consumer discretionary (+47.2%) and healthcare (+22.5%), with average S&P 500 earnings growth clocking in at 29.2%.

So this is shaping up as another bumper earnings season for the U.S. stock market. The same can, however, hardly be said about social media giants Meta Platforms Inc. (NASDAQ:FB) and Spotify Technologies S.A.(NYSE:SPOT) after the companies posted earnings and guidance that fell well short of Wall Street expectations.

Facebook stock has crashed spectacularly, with FB parent Meta losing more than $232 billion in value Thursday in what is the biggest one-day drop in the history of the U.S. stock market. FB lost more than 25% of its value after the company said it earned $3.67 a share, on $33.67 billion in revenue in the fourth quarter of 2021, while Wall Street analysts had forecast the company to earn $3.83 per share on $33.44 billion in revenue. The previous record for amount of market capitalization lost in one day was Apple Inc.’s (NASDAQ:AAPL) $182 billion loss in September 2020.

But what really sent investors running for the hills was Facebook’s revelation that the privacy change that Apple made to its iOS operating system last year will decrease the social media company’s sales this year by about $10 billion. 

“We believe the impact of iOS overall is a headwind on our business in 2022. It’s on the order of $10 billion, so it’s a pretty significant headwind for our business,” Meta CFO Dave Wehner said during the company’s earnings call.

Apple’s latest privacy policy change which requires a double opt-in for ad tracking has been crimping the bottom lines of companies like FB and Spotify whose revenue model relies heavily on monetizing ads. Last April, Apple released an update for iPhones that gives users the option whether to prevent advertisers from using a device ID. Most iPhone users have been opting out, and the feature, called App Tracking Transparency, is now presenting challenges to companies like FB.

Meta’s drop in value comes as the company is looking past its current businesses, such as Facebook, Instagram and WhatsApp, and toward the metaverse, a virtual world based on new technology. Mark Zuckerberg announced Wednesday Meta had a net loss of $10 billion in 2021 attributable to Meta’s investment in the metaverse.

Despite the digital advertising storm, Stifel analyst Mark Kelley  says it is far too early to bury FB. In addition to setting a buy rating and $400-a-share target price on Meta's stock (68.7% upside), Kelley has called Meta"the most scaled and sophisticated digital advertising company we cover," and added that advertisers are "pointing to the company's unmatched scale and marketer tools relative to competitors." 

Spotify plunges on middling user growth projections

Shares of audio streaming services company Spotify plunged as much as 17% on Wednesday after the company reported numbers that mostly beat expectations, but projections for user growth in Q1 were barely in-line with analysts’ projections.

Spotify reported Q4 GAAP EPS of 21 euro cents, better than the expected loss of 43 euro cents while revenue of €2.69B (+24.0% Y/Y) exceeded the consensus of €2.65B.

MAUs grew 18% Y/Y to 406 million in Q4, near the top end of guidance range; premium subscribers grew 16% Y/Y to 180 million in Q4, led by strong promotional campaign performance while premium ARPU grew 3% Y/Y and 1% Y/Y on a constant currency basis. Ad-Supported revenue reached a record 15% of total revenue in Q4 while Gross Margin finished at 26.5% in Q4, above the top end of the guidance range.

Unfortunately, the guidance for the current quarter for MAUs of 418 million and premium subs of 183 million fell short of analyst forecasts.

Spotify CEO Daniel Ek opened up the company’s earnings call by addressing the ongoing controversy over podcaster Joe Rogan in its report, which has led musicians to pull their music from the platform. Rogan has been accused by medical professionals that he has repeatedly spread conspiracy theories about Covid-19 on his show. Spotify, meanwhile, has been under fire for hosting the episodes. Spotify bought the exclusive streaming rights to “The Joe Rogan Experience” in a deal reportedly worth more than $100 million.

Morgan Stanley, one of the company’s bullish defenders, has admitted that Spotify's call to reinvest profits into the business is reinforcing a bear-case assumption: that it's structurally a low- or no-margin company but is staying Overweight on the expectation that margins are expanding due to scaling the podcast business and marketplace products.

Citi's also got a Buy rating at a $240 target (37.6% upside).

Snap soars after stellar earnings and guidance

But last week was not all doom and gloom after Snapchat parent Snap Inc. (NYSE:SNAP) managed to wrap up a happy Friday with a stunning 60% gain, its best day since the 2017 IPO, thanks to robust earnings and solid guidance.

Snap reported that it earned $0.22 a sharen the fourth quarter, excluding one-time items, on revenue of $1.3 billion, compared to a profit of $0.09 a share, on $911.3 million in sales in the year-ago period. The company's results surpassed analysts' consensus forecasts for a profit of $0.19 a share, on $1.2 billion in revenue.

The company said user engagement showed more strength, as daily active users, one of the company's main gauges of its performance, rose by 20% from a year ago, to 319 million users. Meanwhile, daily average users also grew in its North American, European and rest of the world locations both sequentially and on a year-over-year basis.

Advertising appeared to remain strong for Snap, as the company rolled out several new platforms and programs for advertisers during the quarter, including allowing advertisers to utilize a single set of ads across different and multiple ad formats, and for Snap to optimize the delivery of ads.

Snap provided strong Q1 2022, saying it expects revenue to be between $1.03 billion and $1.08 billion. That range represents an increase of as much as 40% over the $770 million in sales that Snap recorded in the first quarter of 2021.

The positive reaction to Snap's results was enough to completely make up for the company's 23% drop in the regular market session.

Bank of America analyst Justin Post raised his SNAP rating to buy from neutral, keeping a $55 price target (41.4% upside), noting that the "unexpected" fourth-quarter revenue beat and "healthy" guidance provided confidence that there are workaround solutions for the changes that Apple made with its iOS 14.5 IDFA and "the platform is not permanently impaired."

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