Meta hammering has key clues on changing premise of Big Tech valuations (Commentary)

FANG — or FAANG, if you prefer adding another ‘A into the colourful, double-meaning Big Tech acronym — needs renaming anyway.

Not merely because the ‘F’ in Facebook is ‘M’eta now. Or that Mark Zuckerberg faltered so spectacularly this quarter.

The case for revisitation involves fundamental premises on which Big Tech Godzillas hold the keys to our digital futures.

So, even as Meta saw $230 billion of market cap melt away, three of the Big Techs — Microsoft, Alphabet and Amazon — buoyed investors with stellar results. Each one bested analyst numbers.

In essence, tech companies that control key gateways to e-commerce and hybrid work and, in some cases, streaming entertainment, have not seen a dip.

Microsoft and Alphabet rode on the back of cloud services. At Microsoft, Azure and other cloud services was the fastest-growing division, raking in 46 per cent more revenues in the December quarter compared to the year before.

At Alphabet too, the cloud product generated 45 per cent more sales in the fourth quarter compared with last year. At $n5.5 billion this beat street estimates of $ 5.4 billion.

The division’s operating loss narrowed by 45 per cent to $ 3.1 billion in 2021.

Cloud services are leases of processing power to third-party businesses so they do not have to run their own servers.

A FactSet consensus stated that Microsoft and Alphabet are taking the market away from their biggest competitor. To be fair, however, rival Amazon’s AWS – which counts Peloton and Netflix as customers – is growing too.

Countering fears that Apple too would be hit by the same supply chain issues that have dented e-retailers like Amazon, iPhone revenues increased 9 per cent to $71.6 billion. Analysts had forecasted $70 billion.

Overall, Apple’s net profit was up 20 per cent thanks partly to the 24 per cent growth in its high-margin service units like App Store and Apple Music.

The pincer of margins, fads and analyst expectation spilled over to mid-size tech too. Peloton and Robinhood, both poster children for lockdown shares in the US, seem emblematic.

Peloton, an at-home fitness business, went public in September 2019 and saw takers zoom from 100,000 in 2017 to 2.77 million in the most recent quarter. But even this figure came in below low-end guidance of 2.8 million.

Due to this “slowing demand”, Peloton has temporarily halted production of its connected fitness products, CNBC reported, and share prices slumped more than four-fifths in the past year. Analysts have turned the screws further for the months ahead.

Likewise, Robinhood. Even as Americans took to commission-free trading and the company’s revenues almost doubled to $1.82 billion via 17.3 million active monthly users (48 per cent more than in December 2020) MAUs fell 1.6 million from the quarter before. On their part, analysts had expected an increase of 1 million. Robinhood expects a 35 per cent annual drop in revenue in the next quarter.

Netflix seemed closer to real cash flows than either Peloton or Robinhood. But subscriptions suffered signs of fatigue. In the last quarter of 2021. Additions were 8.3 million, below expectations of 8.5 million, and the just 2.5 million net subs added for the first quarter of 2022. This is nearly 40 per cent closer that the 4 million the company added in the first quarter of 2021.

Rivals Amazon Prime, Disney and HBO kept hammering more content and growing their subscriber base. On top of this, with Covid-19 restrictions lifting, core audiences seemed to be spending more leisure time away from small screens. The only option therefore was burning cash on fresh content. Result? An erosion of operating margins.

Netflix’s long-term growth potential has far from ended though. Hedge fund Pershing Square Capital Management purchased $1.1 billion worth of shares just last month. It justified this saying that Netflix was “a primary beneficiary of the growth in streaming and the decline in linear TV driven by its superior customer experience”.

Such optimism aside, Netflix’s comparators are proving to be tougher than most. In contrast, for Apple, Alphabet and Microsoft, it seems business as usual.

Google parent Alphabet posted quarterly sales topping expectations Tuesday. Its advertising business surged on consumers using search as they shopped online and clients consequently upping their marketing budgets.

Alphabet’s sales were up 32 per cent to $75.3 billion in the fourth quarter, for a third straight quarterly sales record and topped the average estimate of $72 billion among financial analysts tracked by Refinitiv.

Shares jumped more than 8 per cent synched, in part, to the announcement that the company would undertake a 20-to-one stock split. (There is a split in the jury though. Naysayers feel the benefits of split tactics diminish value.).

The share price reinforced the global trend that a more digital economy has made Big Tech companies (Meta being an exception) resistant to small-market shocks.

Why? Consumers had dived into Google to search for apparel and hobbyist items, while retail, finance, entertainment and travel advertisers had raised marketing budgets.

The consensus among analysts is that Google, which generates more revenue from internet ads than any other company on the planet, is unstoppable for the foreseeable future.

Across 2021 and 2020, Google’s advertising business, including YouTube, accounted for 81 per cent of Alphabet’s revenues. Inc and ByteDance’s TikTok have been been nibbling away small pieces of Google’s share of the global advertising market. But market forecasters do not expect major slippage in Google’s base. The secondary businesses, including Cloud, also have been lifting overall sales.

Alphabet also reported a quarterly sales record during the holiday season for its Google Pixel smartphones, despite what CEO Sundar Pichai called “extremely challenging” supply constraints.

Pichai also said Cloud is exploring how to support clients that want to use blockchain, one of several emerging technologies that proponents view as crucial to kickstarting a new era of online innovations.

Multiple lawsuits pushing back on Google’s anticompetitive conduct in the advertising and mobile app store markets continue to be his biggest challenges. Google already has said that efforts to lower Play app store fees might assuage some of these concerns but will dent revenues.

This hasn’t stopped the cash hoard from growing by nearly $3 billion in 2021 to $139.6 billion, with another $50 billion going to buying back shares.

Like Zuckerberg and the metaverse, not all of Pichai’s bets are working out just as yet. The operating loss for Other Bets, a unit that includes self-driving technology company Waymo and other non-Google ventures, was $5.3 billion in 2021, widening from $4.5 billion in 2020.

Shares in the social media platform, Splash, plunged 23 per cent Thursday as investors fretted that a weak revenue forecast from Meta would spill over into the wider digital advertising sector.

The end result of all the stock market drama was that Snap’s shares settled back to the level they were trading at just three weeks ago.

On the macro front, volatility has stalked tech stocks sparked by the prospect of rising interest rates and a slowdown in digital demand.

But after the blizzard of fourth-quarter earnings announcements, the mood elsewhere in Big Tech was far more sanguine.

The Big Tech growth story is far from broken. A continuation of the buoyant demand for the underlying technologies that support the digital economy — cloud computing services, along with PCs and smartphones — means that “the 2022 growth runway looks pretty good for most of these companies.

“Things are slowing down, but it isn’t falling off a cliff,” said Jefferies.

The curtain on the earnings season for the biggest tech companies came down late on Thursday, as news of Amazon’s earnings sent a wave of relief across Wall Street. The company’s shares surged 15 per cent in after-hours trading, even though it missed revenue expectations.

Resilience was not universally on display, particularly among some companies that benefited most from pandemic restrictions.

Privacy changes introduced by Apple in the middle of last year have complicated the picture by hurting targeted advertising at some companies, though it has been hard to assess the full impact amid mixed signals in the sector.

Meta expects to lose $10bn of revenue this year because of Apple’s changes. But earnings at Snap and Pinterest topped expectations, and Snap said it had already started to recover from the effects of the Apple changes.

Add to this unrelenting competition. Meta’s outlook was hurt by competition from TikTok, prompting concern that Facebook’s platforms may be facing an erosion of audience attention.

The Meta setback is a warning sign that the potential markets for some tech products and services may not be as big as investors had come to believe.

Payments company PayPal, which this week cut back its predictions for user growth after deciding that many of the new account holders it added during the pandemic were unlikely to ever be profitable. PayPal’s share price went down 60 per cent, slicing $220 billion from its market value since 2020.

The idea of “big” technology companies entered the public consciousness around 2013, as some economists saw signs of these companies gaining appreciable dominance without any regulation, and were no longer considered disruptive start-up companies following the early 2000s dotcom bubble.

The term became popularized and labelled as “Big Tech” around 2017 in the wake of the investigation into possible Russian interference in the 2016 U.S. elections. The roles that these technology companies have played with access to wide amounts of user data and ability to influence their users came under Congressional review.

The use of “Big Tech” was similar to how the largest oil companies were grouped under Big Oil following the 1970s oil crisis or how the major cigarette producers were grouped as Big Tobacco when the U.S. Congress began seeking regulation on that industry.

FANG was an acronym coined by Jim Cramer, the television host of CNBC’s Mad Money in 2013 referring to Facebook, Amazon, Netflix and Google. He called these companies “totally dominant in their markets” and considered them poised “to really take a bite out of” the market, giving double meaning to the acronym. Cramer expanded FANG to FAANG in 2017, adding Apple to the earlier four.

Following Facebook Inc.’s name change to Meta Platforms Inc. in October 2021, Cramer suggested replacing FAANG with MAMAA; this included replacing Netflix with Microsoft among the five companies represented as Netflix’s valuation had not kept up with the other companies included in his acronym; with Microsoft, these new five companies each had market caps of at least $900 billion compared to Netflix’s $310 billion at the time of Meta’s rebranding.

Although smaller in market capitalization, Netflix, Twitter, Snap and Uber are sometimes referred to as “Big Tech” due to their popular influence. Twitter is categorized as Big Tech due to perceived political and social influence.

There are also two Chinese tech companies in the top ten most valuable publicly traded companies globally at the end of the 2010s – Alibaba and Tencent. Some argue that Asian giant corporations Samsung, Alibaba, Baidu, and Tencent should be included in the definition. Baidu, Alibaba, Tencent and Xiaomi, collectively referred to as BATX are often seen as the competitor companies of Big Tech in China’s technology sector.

ByteDance has also been considered Big Tech. Together, the combination of the Big Five, IBM, Alibaba, Baidu and Tencent has been referred to as “G-MAFIA + BAT.”

The metaverse is a concept of a persistent, online, 3D universe that combines multiple different virtual spaces. You can think of it as a future iteration of the internet. The metaverse hopes to allow users to work, meet, game, and socialize together in these 3D spaces.

(Nikhila Natarajan tracks Big Tech and tweets @byniknat)




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