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Meta earnings: Zuckerberg is ‘clearly listening to Wall Street,’ analyst says

Jefferies Senior Analyst Brent Thill assesses Meta's Q4 earnings beat, the social media company's outlook amid tech industry layoffs, and user engagement on the platform.

Video Transcript

SEANA SMITH: We want to talk to Brent Thill, Jefferies equity research analyst joining us now with more on these numbers. Brent, I know you've only had a couple of minutes to look at it, but let's start with revenue there. A beat in terms of what we were expecting on the Street, 32.17 billion. Your reaction to that, maybe some of the weakness in the ad spending market. Is that starting to level off?

BRENT THILL: Yeah, I think-- I mean, look, the expectations were so low that ultimately, it's not like these are stellar numbers. They're just better than expected, 2% better than what the Street wanted, or for the key one-- key ones actually ahead by 5% above the Street. So revenue looks good. I think what's more encouraging is the expense cuts. So they're cutting their expense guide by $5 billion and CapEx by $4 billion. Remember, this is a company that last quarter, everyone was like, what on Earth are you doing, Mr. Zuckerberg? This is crazy.

And then two weeks later, he pulled back the throttle, which was at 12 on a scale of 10. He pulled it back to a 9, and now he's back at a 7 on expenses. So he's clearly listening to Wall Street, listening to what we all want and saying, look, we don't need the headset, walking around a virtual reality world right now. What we need is the platform on Instagram, which is driven by advertisers to be better. And I think ultimately what this demonstrates is that he's listening.

They pulled back the throttle on expenses. I mean, no one's going to do backflips over the revenue growth, but ultimately, now you have a better topline. You have a way better expense bottom line. Definition of a beat, and again, a very cheap multiple that had a terrible year last year. And we were wrong last year. We thought things wouldn't be maybe as bad.

And so I still think we're not out of the woods with the economy. We're not out of the woods with ad spend. I think clearly, Facebook and Meta is going one way, and Snap's going the other way. And so there is some share gains, and we'll see-- I don't think TikTok is disappearing, but certainly, they were behind. Maybe part of this is playing a little catch-up, too, to TikTok.

DAVE BRIGGS: Investors certainly cheering the $40 billion share buyback. What's the most concerning thing you've seen in this report so far?

BRENT THILL: Well, I mean, you just flashed a headcount number. I don't know the percentage-- I haven't calculated that, but if that's right, that's still a pretty high net add in terms of employees. So I'd say margins are our concern. We're keeping an eye on that. I think clearly, going into this, the stock was already up 27% year to date. Now with the stock close to 180, you've had a very material move. So I would just be cautious as it relates to anyone kind of jumping in the pool right after this. We've had a massive move.

And the move started when he pulled back on the expenses. When he came back to all of us two weeks after, he said he was going to spend like crazy, saying, well, maybe I won't be spending like that. So I would just be concerned about the magnitude of the move of the stock, number one, on number two, the expense structure still, and I'd say number three, look, we're not out of the woods on the economy. I mean, I think every economist is saying that we're still in a tough environment and that it could get worse as we go throughout the year. At least, many the economists are saying. So we just got to keep an eye on that.

SEANA SMITH: Brent, what do you make-- well, in this release, Zuckerberg touting the engagement that they're seeing on their apps. He also talked about the AI discovery engine reels being major drivers of that engagement. What do you think about the progress more specifically that has been made on reels and the opportunity that that presents Meta here going forward?

BRENT THILL: Yeah, Reels has really caught up. I mean, again, I think any of us have spend time on Instagram, there are some Reels I get that I'm kind of like, why am I getting this? And the next thing you know, you've wasted 15 minutes getting sucked into some ski video or golf training that you never had intention of getting involved with. And so I think ultimately, it's making progress.

I went to post a story about my family on Instagram the other day, and it says, hey, would you like to turn it into a Reels? And it puts some rock music to it. And it was like three clicks, and it was boom, it was up. It was a video. And it was like-- it took me 10 seconds to do it. So from a user posting content and creating a reel, super easy. Way easier than before.

And then on the other side, I think engagement is going higher. And you can see it when you talk to anyone that uses Instagram. If you use it, you know what I'm talking about. You get sucked in, and then next thing you know, you see the ad for the golf training ad. You see the ad to go to Portugal. You see the ad for the cruise line. Like, that engagement is very good.

DAVE BRIGGS: And this may be difficult to quantify, Brent, but are they getting through the Apple privacy changes? Are they beginning to get to the other side of it?

BRENT THILL: Yeah, that's done. That's done. They're on the other side. That was in all last year. That was clearly an avalanche of headwinds that they've now figured out. We were lapsing-- we're lapping through that. And I think, look, anyone that was on Instagram and that had been giving them the accurate data of who you are and what you'd like has only seen incredible, incredible targeting, which is what I want. I don't want to tell the system I'm 80 years old, and I get an ad for a bathtub that the side of that bathtub opens. I don't need that yet. I will at some point.

But I don't want to see that. So my point is like, the initial people that were onboarding or surfing the platform, yeah, it wasn't maybe as good. But I think, look, it's only gotten better for me as a user. And I think your reporter also mentioned his experience, too. So those of us that have been using it are only finding what I would consider insane targeting, better targeting, and better ad placement than anyone.

So if I care about the band or sports or whatever, like, that's why I'm on the platform. And there's a lot of other platforms that do not give that to you. Snap is one of them. Just the usability is just not exciting. And so I think there's a lot of other social platforms that Facebook and others have said this, that their ability and their size and their scale to fight through the Apple changes, they'll come out on the other side. It feels like we're coming out on the other side of the tunnel right now.

I just don't know if we're about to go into a tunnel that's dark because advertisers now start to pull back because of the macro through this year. And that's still the big worry that we're keeping an eye on, and then, again, the magnitude of the move now with the stock at 180. Now we're talking, like, gains of pretty much outperforming almost any tech stock year to date. That's a concern, the magnitude of this move.

SEANA SMITH: Brent, what about the $40 billion in buybacks here? We know 2022 was the worst year on record for Meta, the timing of that and what that really signals here to investors. Obviously, a little bit of confidence, would think.

BRENT THILL: Yeah, I mean, look, it's nice that they are able to move forward with a fitness app, which I thought was crazy the FTC would fight this, but they got a victory, which is, look, there's only a couple of uses of cash. This company has incredible margins, incredible scale. But I think the fact that they're saying, look, they can't really do a lot of M&A, what are they going to do? They're not going to pay dividend, a big dividend. They're going to use it for buybacks. And so Google's been doing this. The rest of the industry is doing this. They can't really do any transformative M&A.

So they're going to plow their excess cash back into their stock. And given where tech stocks went. Look, it was an awful year last year. And look, none of us got all of these right, but it got overbearish. And we're seeing a massive inflow back into tech. And you're seeing it. Again, pull up the XLE. The energy index is flat year to date. Internet and semis are ripping up 20%, 30%, 40% 50% So I think we have a restructuring of institutional money back into tech. Everyone's still offsides. No one's back where they want to be.

And I think we're going to see-- we're going to see that. So the buyback, again, is helpful. But remember, they've been buying stock back for a long time. And every quarter, they've made a commitment to the buyback, but no one was listening. It's just the sentiment on tech was so bad. And now all of a sudden, overnight, it's amazing. So I think it's incredible how fast things change on Wall Street.

DAVE BRIGGS: What will re-solidify your buy rating from the call? What's that one thing you need to hear?

BRENT THILL: I think Zuck got that the Metaverse is not the end all, be all, that us all having virtual reality glasses or headset and going into an alternative world is not the end all, be all of it. At the end of the day, there are great brands that want to advertise on this platform, and that's 99% of their revenue, right? So the reaffirmation back to the core, number one, and then number two, the expense. They have been spending a lot of money on things. We don't know what it's going to be.

But he's clearly completely changed the trajectory by cutting the expense guide by 5 billion and CapEx lower by 4. So the commitment that they can continue this cost discipline, every tech investor right now doesn't really care. They understand the revenue growth is decelerating. They want to ensure that they're not-- the thing that they can control is the bottom line. So that would be another big focus that we're going to be listening for.

DAVE BRIGGS: Looking forward to that. Jefferies Brent Thill, always good to have you, sir. Thank you.

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