Today's Markets: Nasdaq futures down after FB miss, traders look ahead to BoE + ECB

Facebook daily active users falls for the first time on record as Meta takes a pummeling on earnings miss

February 3, 2022

Facebooks daily users drops for first time on record
Spotify warn of slowing subscriber growth
However, stock markets higher on Wall Street with Alphabet doing the heavy lifting

Markets

Facebook is like the shopping mall: it used to be where all the young, hip kids would hang out for hours on end; now it’s just a place for old people and occasional cranks to get annoyed. I read something like that on Twitter... it’s kind of mean but kind of true. Facebook is falling behind and its main consumers are spending more and more time on TikTok. Some $200bn, or about a quarter of its market capitalization, was wiped off the value of Facebook’s owner Meta (FB) last night as the company delivered a stinging earnings miss and said its user base declined for the first time. Huge penny-stock move for one the biggest companies on the planet. Highlights the risk of being too concentrated... ignoring the obvious it is supportive of the rotation narrative.

Facebook’s big problem is competition for attention – there are only so many people and so many hours in a day and we’re already close to saturation point. Any next big thing diminishes FB. And Apple’s privacy changes are making monetizing those declining users harder since it cannot target advertising so well. Facebook’s daily active users fell for the first time on record. EPS came in at $3.67 vs $3.84 expected, whilst revenues were a little higher than forecast. Weak guidance was killer as it warned of numerous challenges ahead. The metaverse feels a long way away.

Spotify (SPOT) also warned of slowing subscriber growth ahead with its earnings update last night. It’s too early to tell what the Joe Rogan backlash had meant for the company, CEO Daniel Ek said. Shares plunged over 20 per cent before paring losses to trade down 10 per cent in the after-hours market.

So, on the one hand you have quality names like Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL) delivering quality numbers. On the other hand you have arguably more speculative bits - Netflix (NFLX), Spotify - and more outdated corners of the tech space - Meta, Paypal (PYPL) - doing a lot of damage. Question is whether these numbers from Meta spark a renewed drawdown for tech stocks. Watch also the clear read across we have seen in the after-hours market on the likes of Twitter (TWTR), Pinterest (PINS) and Snap (SNAP). A stock picker’s market you could say... which horses do you tie yourself to? Because tying to all of them risks taking a huge hit when you see earnings being sold like that. And on that note the reaction seems way overdone.

Nevertheless, stock markets on Wall Street were broadly higher on Wednesday, extending the win streak for a fourth straight session. Stocks up because of a terrible jobs report... bad news is good news again as it means fewer rate hikes expected. The US ADP employment print came in at -301k (forecast +184.3k, previous +807k), which amounts to a huge miss that signals a weak NFP report (Harker already called it) and is a stagflation reading by any measure. Does that kill the 50bps rate hike chatter? Point is the Fed is fighting inflation not maximising employment – it's in a different mode in 2022 from 2021 and soft jobs numbers are now seen as sign of tight market.

Alphabet did a huge chunk of the lifting, rising 7.5 per cent after the earnings beat. Meta though will have an effect – NQ futs dumped about 300pts after the bell... holding around 14,800 level for now, with the NDX cash market having closed up 0.8 per cent at 15,140 on Wednesday – called to open around 14,850. We talked about how Microsoft, Apple and then Alphabet were offering a steadying hand on the tiller after the emotional rollercoaster of January; well we’re back in Netflix earnings territory again (which was -20 per cent after hours).

In Europe this morning, shares are looking broadly steady ahead of the European Central Bank (ECB) and Bank of England (BoE) meetings. The FTSE 100 was helped by a strong performance at Shell, which reported a strong rise in profits, more buybacks worth $8.5bn and plans to raise the dividend by 4 per cent. Oil & Gas lifted stocks in London to a mild gain of about 0.2 per cent, whilst the European bourses were hovering around the flatline.

Companies

Bumper earnings for Shell after transition year

Shell (SHEL) has roared back to strong profitability in 2021, with the December quarter’s adjusted earnings eclipsing the whole of 2020.

After a year of major changes, including a new unified share structure and the $9.5bn (£7bn) sale of its Permian assets, the company has delivered a major profit increase in Q4 and will now ramp up the buyback programme, while raising the pay rate for the first quarter of 2022 by 4 per cent to 25¢ a share. The $8.5bn buyback goal for the six months to June 30 means the quarterly spend will be $1.5bn outside of the remaining $5.5bn to be handed back from the Permian sale.

Shell joins US giants ExxonMobil (US:XOM) and Chevron (US:CVX) in upping investor payouts amid the oil and gas resurgence from this year.

Shell boss Ben van Beurden said the company was still focused on cutting its emissions despite the resurgence of oil and gas prices. “We delivered very strong financial performance in 2021, and our financial strength and discipline underpin the transformation of our company,” he said.

Adjusted earnings for 2021 were $19.3bn, compared to $4.8bn in 2020, while in the December quarter the company hit adjusted earnings of $6.4bn, a 55 per cent increase on the previous quarter. Shell also announced a much-reduced debt pile compared to a year ago, with net debt down almost a third to $52.6bn.

Read Alex Hamer's full results analysis here.

Markets not buying into Facebook’s metaverse hype

It is probably not the best time for Meta (FB) (formerly known as Facebook) to be going through a painful rebuilding process. With the growth of its advertising revenue slowing the social media company has decided to target virtual reality as its next big play. The problem is that this will be a very expensive business.

In fourth quarter earnings, operating profit dropped one per cent year-on-year due to a 38 per cent increase in costs, which more than offset the 20 per cent rise in revenue. Facebook’s daily active users increased 5 per cent and advertising revenue was still up 20 per cent compared to the same quarter last year.

Reality Labs, the bit of Meta responsible for developing VR, has been split out for the first time. For the full-year, it generated $2.27bn in revenue which is four times more than in 2019. Its operating loss for the year though was $10.1bn, a $3.57bn increase from 2020, due to the heavy investment required to develop this new technology.

If you stripped out Reality Labs then operating income would have increased 3.4 per cent in the last quarter year-on-year. Investors though don’t seem too confident Reality Labs will be the golden goose that CEO Mark Zuckerberg has promised.

Since September the Factset consensus has lowered Meta’s 2024 EPS forecast by 18 per cent to 1,319 cents. On the day of the results, the share price had fallen 24 per cent in after close trading.

The recent aim to launch a cryptocurrency was slipped up by regulatory issues which is maybe the reason for some of the reticence. Potential rising interest rates are also not ideal. Real cash is highly valued at the moment – rather than moon shot ideas. AS

Compass bounces back

Shares in Compass Group (CPG) jumped by 8 per cent this morning, after the contract caterer announced that revenues have reached 97 per cent of pre-Covid levels.

After a predictably difficult two years, Compass said organic revenue rose by 39 per cent in the first quarter of 2022. North America is performing particularly well, with organic revenue growing by over 50 per cent.

The company’s performance in Europe is still hampered by quiet workplaces, however. Sales from Compass’ business & industry division - which provides catering services for offices and staff canteens - stand at just 77 per cent of pre-Covid levels. All other divisions, including education and healthcare, have exceeded past performances.

Compass expects organic revenue growth for 2022 to settle at between 20 to 25 per cent, with quarterly growth rates moderating through the year as comparatives get tougher. Full year underlying operating margin is expected to be over 6 per cent, returning to around 7 per cent by the year end.

The question for investors is whether office catering will ever fully recover - and whether Compass can weather a permanent slow-down. JS

BoE + ECB soup

Eurozone inflation hit record 5.1 per cent, accelerating month-on-month, which is a worry for the ECB today. Italian inflation also hit a 26 year high at 4.8 per cent. Some respite from the German producer inflation figs in Tuesday’s PMI, but the ECB is starting to look well behind the curve – markets already suggesting it hikes at least twice this year.

Nordea: "Headline inflation at 5.1 per cent and core inflation at 2.3 per cent were clearly higher than expected, again. Although energy still dominates the headline numbers, wider price pressures are accumulating."

In short, the market is looking at global bond yields and at EZ inflation and leaning hawkish, but does Lagarde cave? Key questions will be about the thinking (fuzzy) on inflation and any adjustments to the QE programme... no change to policy is anticipated. My bet is she pushes back against notion of rate hikes in 2022 and whilst still acknowledging the inflation risk, stresses that core will ease this year. Is the ECB spooked enough by inflation to move? I doubt it.

BoE meeting ahead looking rather more interesting: with inflation at a 30-year high and the negative economic impact from Omicron far less than feared, the BoE is set to raise rates for a second meeting in a row. Not quite a done deal but close to a slam dunk given the outlook. There are plenty of signs of inflation pressures persisting and broadening; a cost of living crisis is already here. But it’s not a zero sum game: raising rates will hit people on floating rate mortgages, for instance. Increasing the cost of borrowing at this moment carries some risks but ultimately it’s the right thing to do – in fact they should have done it much sooner.

The BoE is likely to commence quantitative tightening by not reinvesting the proceeds of bond purchases, not likely to start selling down balance sheet until later this year.

Markets pricing in for 5 rate hikes…which is pretty hawkish so risks open for a dovish surprise. If it sticks to its view that “some modest tightening of monetary policy… is likely to be necessary”, the market probably takes this as dovish. Does the BoE think it needs to go above neutral to tame inflation?

MPC members have been pretty quiet this year – perhaps they have learnt their lesson from all the miscommunication last autumn.

Oil top?

As expected, OPEC+ agreed to increase oil output by 400,000 BPD from March, although it seems they are going to struggle to match even that modest paper increase... tighter market conditions prevail.

EIA inventories showed a decline of more than 1m barrels, though gasoline built by more than 2m barrels. Getting closer to the bearish MACD crossover that bears are looking for to confirm the near-term top for oil.