Why Shares of Meta Are Sinking After Earnings Report

Summary

The market reacts negatively to Medicare's stock, down over 12% due to disappointing Q2 revenue guidance and increased CapEx. Despite strong top-line growth of 25-27%, investors are concerned by the company's loosening cost controls. The digital ad space, especially for Meta, is expected to grow, boosted by AI initiatives and the upcoming election year. However, there's a looming challenge with attracting younger audiences, as platforms like Snapchat and TikTok gain popularity among Gen-Z.

Takeaways

• 📉 The market's perception of Medicare's performance is negative, with its stock price down by more than 12%.
• 📊 The company's Q1 results show a top-line growth of 25-27%, outpacing competitors in digital ads.
• 😕 The Q2 revenue guidance is disappointing, not meeting expectations.
• 🚩 A significant concern is the increase in capital expenditure (CapEx), which was a surprise to investors.
• 📈 Despite the slowdown in growth, the company has been successful in maintaining cost controls and quality.
• 🔍 The expectation was for the company to keep costs in check, but this does not seem to be the case.
• 📅 Traders are concerned about the company's efficiency and cost control measures, especially looking ahead to 2025.
• 💼 There's a focus on the company's cost and CapEx related to AI, which is a significant area of investment.
• 📈 The advertising business, especially during an election year, is expected to benefit, potentially boosting growth.
• 👥 There's a potential generational issue with the user base, as younger users are moving towards platforms like Snapchat and TikTok.
• 🌐 The company is trying to engage younger audiences with features like Instagram Reels to counter the shift towards other platforms.

Q & A

What is the current market sentiment regarding Medicare's stock?

The market sentiment is negative, with Medicare's stock being off by more than 12%.

What are the two main concerns discussed in the script?

The two main concerns are the revenue outlook for Q2 and the significant increase in CapEx and expenditures.

What is the speaker's view on the company's quarterly performance?

The speaker views the quarterly performance as pretty good, with top-line growth of about 25 to 27%.

Why is the company's CapEx increase seen as a disappointment?

The company has been able to maintain momentum by keeping quality control tight and costs in check, but the CapEx increase indicates that this may not continue, which is concerning for investors.

What is the expectation regarding the company's growth into the second half of the year and beyond?

Growth is expected to start decelerating into Q2 and the second half of the year due to more difficult comparisons, but the exact expectations are not clear and are awaiting further commentary from the company.

How does the speaker view the company's efficiency?

The speaker suggests that the year of efficiency might be over for the company, which is concerning to traders.

What is the potential impact of a TikTok ban or divestiture on other social media platforms?

A TikTok ban or divestiture might actually help other social media platforms like Meta's platforms by benefiting advertisers.

What is the speaker's outlook for Meta's digital ad space growth?

The speaker believes Meta will be able to grow almost double through 2025 in the digital ad space.

What is the speaker's opinion on Meta's ability to maintain its position in the advertising business during an election year?

The speaker thinks that being in an election year typically benefits advertisers, which could help Meta's advertising business.

What challenges does the speaker see for Meta in terms of user demographics?

The speaker sees a potential generation problem with Meta's user base, as younger users are increasingly moving towards platforms like Snapchat, Discord, and TikTok.

How does the speaker think Meta might address the generational shift in user preferences?

The speaker suggests that Meta might improve its ecosystem with new tools and initiatives, such as Reels, to attract younger users.

Outlines

00:00

📉 Market Concerns and Q2 Revenue Disappointment

The speaker discusses the market's negative perception of a company's performance, particularly regarding Medicare, which is off by more than 12%. They highlight the company's Q1 results, noting a top-line growth of 25-27% and outperformance in digital ads compared to competitors. However, the Q2 revenue guidance is disappointing. The main concern is the increase in capital expenditure (CapEx), which was expected to be controlled but has instead spooked investors. The speaker anticipates the company's upcoming call to address these concerns and provide guidance for the rest of the year and into 2025.

05:00

🚀 Digital Ad Growth and Meta's Dependence

The conversation turns to Meta's digital ad business, which is described as a 'cash cow' and is expected to benefit from the upcoming election year, typically a boon for advertisers. The speaker suggests that potential bans or divestments affecting competitors like TikTok could further help Meta's ad growth. They note Meta's rapid adoption of AI initiatives, which have impressed advertisers and contributed to market share gains. The speaker is optimistic about Meta's ability to grow its digital ad business almost double through 2025, despite the challenges of the second half of the current year and into 2025.

📈 User Base Concerns and Gen-Z Engagement

The final paragraph addresses concerns about Meta's user base, particularly the aging demographic on platforms like Facebook and Instagram. The speaker acknowledges a potential 'generation problem' as younger users seem to prefer platforms like Snapchat, Discord, and TikTok over Meta's offerings. They mention Meta's efforts with Instagram Reels as a way to attract and engage Gen-Z users. The speaker also speculates on the impact of TikTok's future developments on Meta's user engagement and business performance.

Keywords

💡Market Perception

Market Perception refers to the overall sentiment and expectations of investors and market participants about a company's performance or the economy in general. In the script, the speaker mentions that the market's perception is 'not good', indicating a negative sentiment towards the company's current situation, particularly with Medicare being off by more than 12%.

💡After Hours

After hours trading refers to the buying and selling of public company stock that occurs outside of regular market hours. The speaker mentions 'after hours' to discuss the potential concerns of investors during this time, which could be related to the company's financial performance or future outlook.

💡Revenue Outlook

Revenue Outlook is a projection or expectation of a company's future earnings. The script discusses the revenue outlook as a potential worry for investors, with the speaker noting that the company's Q2 guidance on the revenue side is a 'little bit of a disappointment'.

💡CapEx

CapEx stands for Capital Expenditures, which are funds used by a company to acquire, maintain, or improve its assets with a life expectancy of more than one year. The script highlights the increase in CapEx as a significant concern for investors, as it indicates higher spending and potential future costs for the company.

💡Digital Ads

Digital Ads refer to any form of online advertising, which includes banners, search engine marketing, social media marketing, and more. The script mentions digital ads as a key area where the company is expected to outgrow competitors, suggesting that digital advertising is a significant revenue stream and growth driver.

💡Efficiency

Efficiency in a business context refers to the ability to produce the maximum output with the minimum input. The speaker implies that the company's efficiency year might be over, indicating that investors are concerned about the company's ability to maintain cost controls and operational effectiveness.

💡Cost Controls

Cost Controls are measures taken by a company to manage and reduce its expenses. The script discusses the expectation that the company would keep costs in check, but this expectation has not been met, leading to investor concerns about increasing costs and potential impact on profitability.

💡AI Initiatives

AI Initiatives refer to the projects or strategies a company implements to incorporate artificial intelligence into its operations. The script mentions AI initiatives as a focus for the company, suggesting that investment in AI is seen as crucial for driving innovation and growth.

💡Gen-Z

Gen-Z refers to the demographic cohort following the Millennials, typically those born between the mid-1990s and early 2010s. The script discusses Gen-Z's preference for certain social media platforms, indicating that the company needs to adapt to attract this younger demographic to maintain its user base and relevance.

💡Reels

Reels are short-form videos, similar to TikTok, that can be created and shared on Instagram. The script mentions the improvement seen with Reels, suggesting that this feature is helping the company to attract and retain a younger user base, which is crucial for its long-term success.

💡Election Year

Election Year refers to the year when general elections are held. The script notes that the company's advertising business could benefit from an election year, as political advertising typically increases, providing a boost to ad revenue.

Highlights

Market perception is negative, with Medicare's stock down over 12%.

The actual quarterly results are quite good, with top-line growth of 25 to 27%.

The company is expected to significantly outgrow competitors in digital ads.

Q2 revenue guidance is a bit disappointing.

The bigger disappointment is the significant increase in CapEx.

The company has been able to maintain quality control while accelerating top-line growth.

Growth was expected to decelerate in Q2 and the second half of the year.

Investors are concerned about the company's inability to keep costs in check.

The year of efficiency seems to be over, which traders do not like.

There is anticipation for the company's guidance and commentary on the call.

The company's focus on costs and CapEx in AI is noteworthy.

The advertising business is a significant cash cow, especially in an election year.

A potential TikTok ban could benefit other social media platforms like Meta.

Meta's digital ad space is expected to grow almost double through 2025.

Meta has been quick with AI initiatives, impressing advertisers.

The communication challenges increase as the company moves into the second half of the year and 2025.

There is a potential generation problem with Meta's user base, especially on Facebook and Instagram.

Meta is finding its way with Reels to attract Gen-Z users.

The impact of TikTok on Meta's business and engagement levels is uncertain.

Transcripts

You take a look at what the market thinks and it's not good.

Medicare is currently off by more than 12%.

After hours, what do you think is the big worry right now?

Is it that revenue outlook or is it that big increase, of course, to CapEx and to

expenditures? Yeah, I mean, listen, I think first off,

the actual quarterly pretty good in my view.

I mean, you kind of look at the top line growing about 25 to 27%, that's a good

number for them. They're probably going to be when you

when you kind of look at the, you know, the rest of the kind of competitors out

there, they're probably by far going to outgrow everybody else on the digital

ads side of things. But when you kind of look at the guide

here for Q2 on the revenue side of things, definitely a little bit of a

disappointment. But we do think the bigger

disappointment is really on the CapEx numbers.

When I look at it and why they've been able to kind of see the momentum that

you've been able to see here over the last 5 to 6 quarters, a big reason for

it has really kind of been able to, you know, keep those quality control

controls really tight as they've seen an acceleration on the top line.

Everybody already knew that growth was going to start to decelerate as we

progressed through that into Q2 and more importantly, the second half of the year

on some of those more difficult comps. But the expectation I think from most

was that they were going to keep those costs in check.

And the fact that we're actually not seeing that I think is definitely

spooking a lot of investors out there until it sounds like what you're saying

is that the year of efficiency is over and that apparently traders don't like

it. Yeah, I mean, I'd go as far as that.

I mean, it's definitely a disappointment, I think, for traders out

there. And, you know, it's it's it is

definitely an end of an era in terms of kind of those those lost controls that

we've seen from the company. And the question now is, what is the

company going to say on the call as far as the expectations go into not only

into the second half of the year, but more into 2025, What kind of commentary

do they throw out there? Do they alleviate some of the concerns

that we're seeing right now or not? I am curious.

I mean, I know there's a big focus on on their costs and obviously the amount of

CapEx and spending that they're going to do on AI.

But just talk a little bit about their traditional business, which is still

just this defiant cash cow, the advertising business we're heading we're

in on an election year already, which typically tends to benefit advertisers.

There's been a lot of discussion about how a tick tock, ban or divestiture

might actually help some of the other social media platforms like meters

platforms, etc. here.

Do you see growth continuing in that ad space kind of unfettered?

I mean, we do I mean, we actually think if anything is kind of, you know, helped

kind of the growth trajectory for the digital ad space out there.

You're absolutely right. I mean, meta is kind of in many

respects, unlike other other, the kind of mag seven names, you know, they're

more of a one trick pony out there and that they're really kind of tethered to

that digital ad space right now. Our view is it'll be able to kind of

grow at almost double through 2025, and I will definitely kind

of help them in that respect. We've seen share gain on Metis side of

things here in recent memory because they've been able to act and move so

quickly with some of their AI initiatives out there, kind of creating

some of those great, you know, admiration

for some of those advertisers out there that will continue to kind of gain

momentum, we think, over the next couple of quarters.

And so that should help their overall business and kind of the growth

trajectory for the digital ad space. But yeah, I mean, in all respect, I

mean, again, the comms do get a lot more difficult as you get into the second

half of this year. Yeah, of course, as you get into 2025

and lap these type of numbers that you're seeing right now.

I am curious though, long term about the user base for matter.

There's been a lot of hay made over, I guess, the age of some of their users

now, particularly on Facebook, but even Instagram.

And I could just tell you with the the kids in my family, none of them

mentioned any better properties. It's all, you know, snap and discord

and, you know, some of their tech talk and things like that here.

Do they have a generation problem that they're going to have to confront at

some point? You know, I do think there is an issue

to an extent from that side of things. I mean, I think they've been able to see

some improvement with reels kind of year over the last couple of quarters.

And, you know, there are more and more, I think, individuals out there kind of,

you know, going towards that Instagram platform on the gen-z side of things.

But I think you make a valid point. I think when you kind of look at some of

the more kind of next Gen Gen-z population out there, it is all kind of

tick tock, it's snap out there. But, you know, I think, you know, when

we kind of think about, you know, matter here, they are starting to kind of find

the way here with reels. I think they're going to be other kind

of tools out there that they throw that could potentially kind of help improve

that ecosystem. And then we also do have to see what

what happens with tick Tock here over the next year or so that could

potentially help their business improve engagement levels and what have you.

So. I think.

Yeah, I think you make somewhat of a valid point.

But yeah, that said, I think there's still not a good place to.