Meta shares surge after earnings, and the future of First Republic 4/26/23

0:28Right now in fast, Meta's major move higher. next straight ahead and later. Chipotle's day after burrito blowout keeps on going, that blowout. Oil's big slide and Tesla loses one of its Wall Street bulls. I'm Melissa Lee. This is Fast Money. We're live with the Nasdaq Market Side in the heart of Times Square. On the desk tonight, Tim Seymour, Karen Feinerman, Steve Grasso, and Guy Adami all here in the house. We start off with an earnings alert on Meta. The stock jumping nearly 12 percent after posting better than expected revenue for the latest quarter. The conference call is just getting underway.

0:58Julia Borson's got the very latest on the numbers. Julia. Well, Melissa, Metta beating expectations really across the board. The company growing its revenue in the quarter by 3 % rather than the 1 % decline that analysts had anticipated. This is its first quarter of year over year growth after three quarters of revenue declines. The company also growing its user base faster than anticipated and bringing down the top end of its 2023 expense guidance range. I spoke to Metta CFO Susan Lee. She told me they are seeing improvement in the broader ad market, even though there is still a lot of macro volatility.

1:33She also said they've been investing a lot in improving the performance of their ads over time. In this quarter, they're really seeing those investments pay off. I asked her about Reels and she said consumers shifting over to Reels, which do have fewer ads, continues to be an overall headwind to revenue. But they do expect Reels to be revenue neutral or a tailwind to growth by early next year. And in light of the company saying that its Metaverse Reality Labs division's operating losses would be increasing year over year, she said that their long-term ambition around the Metaverse is unchanged.

2:07So MetaShares are currently up about 11.5 % in after-hours trading, and the call is starting right now. Melissa? Keep us posted, Julia Vorsen. Thank you. Much better than expected, Karen. You're noting it really across the board, particularly when it comes to ad revenue. Europe was an enormous beat. North America was as well. I mean, ARPU is on every category. North America. What is ARPU standpoint? I don't know. What is it? I believe it's average revenue per user. Nice. Exactly. It's important we explain what acronyms are on this show. We're not talking lingo. Just in North America, Big Beat, Europe, you and I were talking Asia.

2:43I mean, just across the board, revenue obviously really important, but we're in the year of efficiency. If you can have the combination of revenue growth and run your business better, obviously great things happen to the bottom line. One interesting point Julia just touched on was the CapEx top end of the number was a little bit lighter. And that might include restructuring where the street, I'm not sure, includes. So that could be potentially even lower, adding to the cash flow story or ongoing cash flow story. A lot to love here. Yeah. Tim. Top line versus bottom line is always a question in tech companies.

3:15And, you know, but what they did here in terms of their top line is very important. And it's also think about how long ago and now it seems like such a long time ago that the Apple privacy issue was going to be, as Facebook said, a 10 billion dollar revenue hit. Well, you know, here's A.I. again. And again, A.I. investments have meant much better ROI for advertisers. It's been driving incremental ads to this platform, even in a period where advertisers are pulling back more broadly because of some of the macro there. So, again, they're doing whatever they can do. And it's just very interesting.

3:47It used to be a cost-cutting bottom line story, and that's what got us through the last three quarters. But this is now, they're really growing. And while year over year this profit's still down 24%, this was them getting to the other side of the story. Remember, they had two fundamental problems. They had a top line problem and a bottom line problem. They've now kind of addressed them both, but this top line is what everybody wanted to hear. Go back to February 22 when the stock was cascading lower, so it left some gaps in the chart. Carter Wirtz talked about this. So 258 will get us to fill that gap.

4:16But it's interesting how quickly we have forget. We collectively have forgotten about the metaverse. Just throwing it out there. First quarter metaverse division,$340 million in revenue. Street was looking for north of$600 million. Operating loss of$4 billion. I mean, it is it's just an albatross. But the fact that they don't talk about it anymore is given the stock in the year of what you call it, the year of efficiency. That's why we're here. And they deservedly are here in terms of valuation. But there comes a point where I think you pull the ripcord. It probably comes in around 258. Yeah. So everything that everyone said, digital ad business has stabilized.

4:53iOS concerns are basically fading. And when you look at the stock as a whole, no one knows what the metaverse is still. So you have artificial intelligence that you should be getting a premium for. They're not getting any premium for that. The stock is right at resistance. It has to prove itself. So you're questioning, too, where we are in the stock, even though, despite all these things. Well, it's up 75 percent year to date. So now it's, I mean, it's already proved itself. When people say that it's up whatever percent from this really, really low bottom, some would argue, like a Karen, that it should have never hit that level.

5:26It should have never, but it had, if you all remember when we were talking about this, we had D.C. against it. You had everything. He was the poster child for everything that everyone hated on Capitol Hill. And at this point, that seems to be fading somewhat to the background. To me, some of this is, think of the market that we're in. We're in a market where companies are rewarded for free cash flow and delivering. And Facebook, let's call it Facebook. Well, let's not call it Metaverse because Guy just said it was an albatross. Nope. Albatross. Albatross is around that. So, I mean, this is a money machine.

6:01This is an ATM. This is a cash flow machine. if you actually control the expenses. I'll wait to hear what they talk about with 23 expenses. I mean, that could be something that still drags this company down in the aftermarket. And I mean, drags them down. I mean, relative finding some places to get a little frustrated again, because the story can't always be so great. They still have a big buyback out there, too. And I'd be interested to hear what they do around that. But those are the things that are driving stocks to outperform in today's market versus a year and a half ago. And I think they're still that stock.

6:27Just one other thing to add, daily active users also up, you know, 2.3%, which isn't selling a lot, but when you're on a base of$2 billion, right, it's still growth there. Guys, finally on the platform. Oh, I'm always on the Facebook. Good for you. It's like jumping the shark then? I didn't jump anything. How are you getting on? Is that dial-up AOL? I actually have it on my Apple application device here. Fantastic. Good luck with that. A lot can happen on the conference calls we've seen in the past, particularly with Meta, the minute they mention expenses. But the minute this time they mention more year of the efficiency measures, They sprinkle in a little bit of AI.

7:02Yes. Efficiency and AI dust and a little bit of momentum. Ad markets not as bad. And boom, in this market environment. I mean, don't discount also the flight to safety. We're going to talk about First Republic and it's 30 percent decline today. I think that's what we saw in Microsoft to a certain extent last night. No, the Microsoft quarter was fine. There was nothing not to like about it. Things are decelerating, which is normal. What we pointed out was the valuation is accessible. But maybe that makes sense in this environment. People are willing to pay more for perceived stability of these businesses.

7:35And the moats have gotten deeper and wider. And maybe Facebook is one of those companies now. And those companies that are most rewarded, so Microsoft and Facebook here, but really have AI investments that are paying off. I mean, there's no question. They're not just sprinkling AI pixie dust. AI investments are helping to drive engagement, which on Instagram is what advertisers can point to and offset what they were concerned about with the Apple. So to the extent that AI is pixie dust, and it's like, remember when everyone was talking about dropping a blockchain or some kind of a reference? It did seem to be what was going on.

8:08But they're the only ones who are making any money or monetizing AI at all, to your point. No, no, no. I don't agree with that at all. Who's monetizing it? Google. Google's always been my, because AI's always been in the background with search. Exactly. And so it's important in every product they have. And if they called it pixie dust, maybe, maybe they would get a valuation for it. But they're not seeming to. Microsoft did a way better job on the call being super excited about all their AI. But a lot of companies, not just Google, many companies have had AI. And I don't understand how it gets one valuation.

8:46I guess, I don't know, Microsoft is doing a much better job of cheerleading the AI. Facebook's now more expensive than Google. So, I mean, for Karen, I don't know if you're the value girl. I mean, you could make an argument that actually Google's never been this cheap relative to Megaship Tech. We're hearing actually from Meta that AI recommendations have increased time spent on Instagram, to your point, by 24%. So that's a big figure. That's a big number. We're going to talk a lot more about AI a little bit later on in the show. In the meantime, let's get more on Meta's results specifically from Gene Munster, managing partner at Deepwater Asset Management.

9:20Wow, Gene, what is stock reaction? What are the things that you want to know on this call? I want to actually hear about what's happened. It hasn't hit the trajectory of the traders here, but this is a massive asset. They're starting to do direct messaging for businesses to consumers. And as an investor in Meta, this is an opportunity that I think could add 10%, 15 % to the overall revenue in the next few years. So that's one piece I want to focus in. And I think that's an area that people are not going to be talking much about. Also, as long-term investors, I want to just kind of continue to hear their views on their trajectory of their DAUs.

10:00I just want to underscore. Karen mentioned a number. I had a fractionally different number on the DAU growth. Just point this out. I think it was 4 % year over year. That's up from 3.7 % in the December quarter and 2.5 % and 2 % back in June of last year. four consecutive quarters of increasing DAU growth. I know those are small numbers, but the base is massive, 2 billion. That's 35 % of the active internet users are on a meta product every day. And that is addictive products. And those maintaining that, at the end of the day, this whole story, what holds it all together is those DAU numbers. And you do hit a top end at some point when you get all the people.

10:44But that's another piece I want to kind of dial into. And it'll be fun to do. Another thing I'll be doing is the metaverse count. We basically disappeared from their December earnings call. We'll see how often Mark talks about it tonight. So what are the magic words are AI and what else are the and efficiency? Is that what you're looking for? Yeah. I mean, probably AI is the AI is always, you know, that don't want to overlook that toy department, because they'll be talking about that and creating content that the different reels users will use to create content. That'll definitely be something that focuses, will be a topic on the call.

11:24As far as the other key factors here, the year, the efficiency, just one thought on that as well. I'm sure there's going to be a lot of talk on this. I think we've got one more quarter where Wall Street's going to be focusing on this. Our view is that that's going to largely be priced in within a quarter. And then we're going to have to get back to the focus on growth. And next year, the street's looking for 11 percent growth. They're not going to give this on the call. But I suspect tomorrow analysts are going to probably be bumping that up to about 15 percent below where they were pre-pandemic in the mid 20 percent growth.

11:57But that 15 percent is a stable number. Sleep well at night. And I think we'll get some just generally optimistic commentary about just the strength of the platform that can drive that longer, more stable revenue growth. Gene, hypothetically, because it's not going to happen, but if they walked away from it, it's$4 billion loss this quarter, which is not insignificant in a quarter that does$28 billion in revenue, off a base of$340 million in revenues. If they just said, you know what, we gave it a shot, would the stock be rewarded for that? I think it would be rewarded some. I actually did the math on it this quarter.

12:32They reported 220. If they wouldn't have had Reality Labs, it would have been 340. So they would have beaten an incremental 55 % upside. I think the stock would probably get 20 % of that. Some people would be disappointed that they're kind of giving up and they're not as innovative, so they wouldn't get that full benefit. So their multiple would actually come down, I think, if they exited the metaverse. I still think it's the right thing to do. I just published a piece on everybody's talking about AI. Don't forget about the metaverse. Apple's going to be entering this space probably in the summer.

13:03And I think that we will look back five years. It's going to take time, but we will look back five years. And I think that there'll be some redemption for Zuckerberg on the topic. All right, Gene, let us know if you hear anything good on the conference call. Raise your hand. We'll talk to you a little bit later on. Gene Munster. So it's interesting that you mentioned, I mean, they would have to change their name. Back. Back. But they have. Back. I kind of feel like they have thrown it out. I mean, they have thrown it. They've stopped talking about it. And he was never going to walk away and acknowledge this.

13:34But a year ago, the whole point was if this company just focused on cutting expenses and focused on the cash flow that they generate, it would have a massive rally. They've effectively done. They've had different excuses for how they could just focus on expenses. They've had the macro environment. They've had a bunch of different things. No one's needed to push them on the metaverse. I don't think they're going to push themselves on the metaverse. So that's going to be up, though. If Gina's right, that's going to be up in a quarter. And then they're going to start having to answer for$4 billion in losses each quarter.

14:04Let's say that that's the same. It actually increased quarter on quarter, right? So let's say it's the same. Is that okay with you? I think it is okay. I mean, it's way down from where it could have been. And the rest of their business is doing a lot better. So if you put those things together, and they've been very aggressive on reductions in force. So it's not like they're just giving it lip service. They are, in fact, more efficient. And so, yes, I think they can still spend$2 billion. Is the metaverse AI? Does it have aspects of it? Are they two different things? Do we know that? I think they are.

14:38I think they're different things from now on. They're two different things, but they could be used probably. There's probably threads that run through each. Absolutely. I think you'll probably start getting paid on that, which is, I think, what we're all saying. And if they back out of it, they'll call it the meta reverse. Oh. You know what I'm saying? Set that up nicely. So he asked a question when he really didn't even care what the answer was. He didn't know what's going on. He got me. All right. Coming up, more on the First Republic fallout. Shares dropping another 30 % today. One of our traders says time is ticking for the bank.

15:11Why, this weekend could be the last stand. Plus, a pharma flub. The group in the red today is stalling out after an early spring surge. So what can give the sector a boost? We'll debate that when Fast Money returns.

15:28Welcome back to Fast Money. First Republic's plunge deepening today as it hunts for a rescue plan. Shares were halted several times during the session. Bloomberg reporting the regional bank could have its access to the Fed's lending window curbed. FRC is now down 60 percent, 6-0, since reporting earnings on Monday. And First Republic survived this downward spiral. Karen, you're saying that the calendar's got days on it. Days on it, literally days on it, certainly at this rate. I mean, you know, any I don't understand what's happening here in that they've known for a while they need to do something.

16:02Is it that no one is there? Is it I mean, how does news leak out? I can't help but think it's really chaotic there. And then I'm also sort of thinking of this blazing saddles. Remember where the guy holds a gun to his head and said, I'll do it. I'll do it. And he's crazy enough to do it. And there's a bit of that going on. I don't know if this Fed thing coming out was them trying to force this, whoever it is, in a consortium of buyers for stock to get going. Otherwise, the problem is going to be worse. I really believe that if they go up, that they don't find some solution here. So I mean, but they do not have a lot of time left.

16:40And I'm not even sure what would be left. By the way, she just gave the one quote in the movie of Blazing Saddles that wouldn't get us canceled. So I have a question here in terms of the cost to the banking system or the cost to the performance of other stocks in the banking system. Would that hurt other bank stocks if FRC went under? I think it would a little bit because I think the FDIC would have to say, listen, this is terrible. We've got to do something. Right. So regulation, the talk about regulation cooled off a little bit in the last two or three weeks. Right. It's a little less urgent.

17:20And I think that if they would have to come in, insure deposits again. And I think, you know, that I think they would have to say, all right, we really got to have a different kind of structure here. And that would be bad for regionals, for sure, potentially for money, you know, CFIs as well. Systemically important financial institutions. And I think that same phenomenon deposits move again. I just don't think it would be good for anything. Also, I do think there's a little bit of First Republic is a beloved franchise. I love the product. And I think that's helped them a little bit. You know, if you remember Bear Stearns at Long Term Capital and they didn't help out.

18:02And then when Bear Stearns was in trouble, the rest of the street said, too bad. But I think First Republic does have some friends on Wall Street who do want to help them. I don't know why it's taking this long. Why would they buy some of their book at an immediate loss? If they got some sort of warrants, some sort of pass from the Fed, something. You could imagine them crafting something that would allow them and a little bit of an extend and pretend. Brooklyn Dodgers were beloved. They moved. People found something else. But I hear what Karen's saying. You know, the lifeblood of this economy is small business, right?

18:32They employ, I think, 70-something percent of all people. The lifeblood of small business are small, medium, regional banks. This is not good because people are going to say, you know what? Why do I need to be in some of these regional banks? I want the security of a larger bank. These larger banks aren't going to service necessarily small business because it doesn't make sense for them to do that. So what's a trickle down effect? It's not going to happen tomorrow, but you've got to start connecting dots and say, this is not good for the economy overall. So this is the last stand. We need to prop FRC up to save the regional banking system.

19:03Don't you think it's mixed signals, though? I'm glad Karen used the analogy of Bear Stearns. So Lehman goes, Bayer gets bought out by Jamie Dimon, and now this one, some fail, some are existing. So we have no closure. So the market can't move on until there's something firm. We don't have that yet. A couple things are interesting to me, first of which is that the New York Mets came out of the Brooklyn Dodgers. Yeah, that's exactly my point. So huge positives can come out of negative things. But most of the street, it seems like half the analysts on the street that cover this stock have moved to not rated because they can't even make a call on this.

19:43And so I just say that to folks at home. I'm not sure you have any idea what you can do. And if analysts who've been following this company for years say we no longer impact on the other banks. If you're in KRE or if you're in some of these other carry, which was up today, by the way, which did fine despite a 30 percent decline in this one. So what that is, that is that the question? The question is, how does your bank holding do in the light of an FRC? As a depositor or as a holder of the stock? As a investor. I think it's a negative. I think this regulatory issue is a negative. There's a lot more fast money to come.

20:16Here's what's coming up next. Pharma stocks ailing today as the group legs the market in a big way. So what's the right prescription for this trade? Plus, the AI war is heating up. And two big players in the space are taking very different approaches. So who will come out on top in the battle of the bots? You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

20:53Welcome back to Fast Money. Buzzkill on pharma stocks. Bristol-Myers, Moderna, Merck, and Amgen. Just some of the names under pressure today, all dropping two plus percent ahead of a big day for farmer earnings. And Pfizer sinking to a new 50 two week low now trading at levels not seen since June of 2021. I'm going to read the sentence. So what's the prognosis for the. No, you didn't do that. Is that in a teleprompter? It says it's slightly amusing. So what's the deal here? Ahead of earnings. Well, there's a prescription. for this. Nice. Well played. I think what's, in my opinion, Eli Lilly, all-time highest.

21:33They've all had tremendous runs. My sense is it's people taking money off ahead of earnings because if you go back in historically and look, a lot of times it's sort of rallying earnings, sell-off posts, maybe people front-running that. I have no idea. In terms of a group, I think you still own these stocks. I mean, I'm not saying they're bulletproof in this environment. I think valuations are probably a little bit rich but reasonable. I think you want to stay with those that win. Merck, Lilly, top of the list, in my opinion. Aaron? Yeah, I mean, I didn't see anything particular. I thought, oh, maybe we saw some government thing and, you know, talking about drug prices.

22:06I think Guy is right. It's just maybe a rotation in front of earnings. However, these have been good for the portfolio. Side effects do exist, though, as we know. Some people suffer drawdowns. But I still like the space. I think, you know, all the things that made it good, which were valuation and yield, which I don't normally love. But I don't think any. I mean, that's all right. If people want to rotate out, I'm not going to trade around that. Hang on. Yeah, I think in the case of a handful of them, it's been a heroic run. So it makes a lot of sense. Look what's going on in health care more broadly.

22:44Look at United Health. Look at some of these stocks that have been very defensive and places to hide out. Pfizer is a name I became long somewhere in the last six weeks, eight weeks. And, you know, it's been a tough eight weeks. It's not been devastating. But, you know, as you said, that move in Pfizer is near the bottom of a range that it hasn't traded in a while. And this is a company that was one of the COVID darlings. And some of that is what's going on here. They need to prove that they've got a pipeline. They've made major investments. And with a lot of big cap pharma, it's about where's your pipeline?