Prof G Markets: Meta’s Monster Quarter, Buying Elon’s Twitter Debt, and America’s Deficit

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1:19Welcome to Prop G Markets. Today, we're discussing earnings from Snap and Meta, the anniversary of Elon's Twitter acquisition and America's deficit. it. Ed, guess where I am? Vegas, baby. I went to the sphere last night and saw U2. It's incredible. I haven't seen that many white people since the Taylor Swift concert. Oh my God. It's literally every white person between the ages of 50 and 65 was at U2 last night. Have you got the kilt on yet? No, don't have the kilt on yet. I did a little bit of gambling last night, but no, it's pretty, it was a Wednesday night here, so it wasn't that much fun.

1:55Anyways, enough about you. So give us the headlines here, Ed. Let's start with our monthly review of Market Vitals.

2:07The S &P 500 was down. The dollar was up slightly. Bitcoin rose. And the yield on 10-year treasuries climbed. Shifting to the headlines. U.S. GDP rose 4.9 % in the third quarter. That's up more than expected from the 2.1 % pace in the second quarter. It was also the fastest expansion in nearly two years. 41 states are suing Meta, alleging the company uses addictive features on its app to, quote, exploit young users for profit. Google reported lower than expected profit in its cloud unit and its stock dropped more than 10%. That wiped out nearly$180 billion in value in one day, the company's largest ever single session loss.

2:48Meanwhile, Microsoft beat expectations and posted 13 % revenue growth. That growth is largely owed to AI-fueled demand for its products. Microsoft's stock rose nearly 5%, adding about$75 billion in value the day after the report. Scott, do you have any reactions? GDP growth at 5 % just blows me away. I just can't get over, and I don't know if that's going to be inflationary or not, or if people are worried that that growth is too good. But I mean, effectively, if anyone was to project what would happen this year in terms of the economy in the face of this dramatic escalation in interest rates, I think they'd just be blown away that we're not only not going into a recession, I mean, growth of 4.9%, that means about every 14, about every decade and a half, if you maintain that growth rate, you'd double the size of your economy.

3:37Was there any color or detail on why the growth was so strong in it? Everyone just says it's because consumers are back to spending. And the thing that I found, I mean, I agree, I thought it was a staggering number. And the thing that was so strange is that the markets barely reacted. The stock market didn't move, yields didn't move. So this was already priced in, basically. And I guess that would mean from an interest rate perspective, investors aren't that worried that we're going to see more rate hikes. But yeah, I mean, I thought that number was shocking. And you'd think that people would be a little bit more worried considering the whole point of this rate hike cycle was to stop this from happening.

4:14I'm just blown away by this. If you think about the fact that everyone's been predicting where everyone was predicting a recession, that is the technical definition of maybe the wrong definition is two quarters of consecutive negative GDP growth. And we're essentially at 4.9%. I mean, this is just amazing. And then you compare it to our closest analog and that is Europe or the UK. They look as if they're probably going into a recession or already in a recession. And yet we're up. We're growing 4.9%. We are an outlier, Ed, but in a very, very good way. It's good news for America, and you could argue it's sort of a victory for our policymakers.

4:50In terms of 41 states suing Meta, you know, my question is who are the nine that are not? I don't know what the legal veracity is of a case like that. I would bet that Meta is going to deploy hundreds of lawyers and delay this thing, maybe settle, you know, sign a consent decree and take a fine. and then they'll violate the consent decree slowly but surely over the next five or 10 years as they make 20 or 30 billion dollars in cash flow a year, pay a fine of one to five million. I just, the problem here, Ed, is until we have a fine that is material for these guys or somebody does a perp walk, all of this stuff is just sort of the cost of doing business.

5:29This feels a little bit like the state's getting together to go after tobacco. But what people forget is people talk about antitrust and they say that, you know, well, these products are free. Why would we break them up? The ultimate test of antitrust or monopoly abuse is the consumer paying increased prices. And with products that are free, it's obviously hard to apply that sort of Borg test. And what I would argue is that a company like Meta that has two thirds market share of all social, that that monopoly abuse has extracted dramatically increased prices or costs, if you will, from consumers in the form of non-economic costs.

6:06And that is if Meta had 10 or 20 % share as opposed to 66 % share, I think advertisers and parents would have more options and decide that, you know, I'm under the impression based on every piece of data I've seen that they really don't care about children and are willing to put in place algorithms and allow unfettered non-reviewed content to show up vis-a-vis an algorithm when the algorithm senses a kid is thinking about self-harm and starts sending them images of nooses, razors, and pills. And I believe that they could stop this, but they don't have much motivation to stop it because they're the only game in town.

6:44And the result is that parents all over the world are paying increased costs in the form of incredible anxiety, incredible fear, because Meta doesn't need to do anything about it. Well, I think we should just put a ban on using social media below the age of 16. Like enough with these lawsuits, just make that ban. It feels like that's something everyone agrees with on both sides of the aisle. I'm just confused why we haven't taken serious steps to actually do that. Well, they claim, Snapple claimed it at age gates. And I think with sole Instagram, the problem is there's no enforcement. And they start going to this, well, you'd have to violate people's privacy to get age verification for every user.

7:23and you need anonymous accounts. So some human rights activists in the Gulf can talk about her important work without the fear of being unmasked. I mean, they just hide behind all this delay and obfuscation around anonymity and free speech and the importance of anonymous accounts. And the reality is, we're not talking about the realm of the possible. We're talking about the realm of the profitable. They could absolutely figure this out. They did figure out a way to provide anonymity to politically sensitive accounts using the blockchain or some sort of third-party verification and still age-gated.

7:53I mean, we figured out a way to age-gate the military, age-gate alcohol, driving. You know, we age-gate almost everything in our society, but these guys can't figure out a way to keep 16-year-olds or 13-year-olds off of Instagram or Snap. I agree with you, age-gating does seem like the most elegant way. And then with respect to Google and Microsoft, kind of the tale of two worlds here where Microsoft beat expectations, 13 % revenue growth on a company that's doing almost a quarter of a trillion dollars in revenue each year. It's hard to grow double digits when you get to the law of big numbers like this.

8:27And also, there's just no getting around it. There has been an enormous transfer in power and market capitalization from the new kid, or arguably, relatively speaking, the new kid, and that is Alphabet, to Microsoft. And their incorporation of AI across search and their Microsoft Office Suite It just feels like this company is absolutely on fire. Meanwhile, almost overnight, Alphabet feels poorly managed and as if they are going to be the textbook case of the innovator's dilemma. You know, this is really man bites dog. Sort of the traditional player is more innovative, takes a bigger risk. And the newer player, the new-ish player, looks flat-footed.

9:12In sum, Sachin Adela should make a shit ton more money than Sundar Pichai this year. What are your thoughts, Ed? I mean, put it this way. I feel like Microsoft is riding on an open AI wave right now. It's like the premier enterprise product, and it's the only product that all these enterprises really know, hence why their cloud business is booming. But AI is getting so much investment. We're going to see billions of dollars going into all of these new AI alternatives. And already, companies are actually looking to get away from open AI because it's just getting so expensive. So, you know, Salesforce is looking for alternatives.

9:46Wix is looking for alternatives. And I think what we're seeing is that AI is almost becoming commoditized, where people are going to be less obsessed with this new product that OpenAI is offering, and they're just going to say, okay, where can I get the cheapest, cheapest option? So I think in that sense, we might be over-punishing Google, because there's a high probability that someone who doesn't want to pay OpenAI prices is just going to go to Google, who may start offering lower prices. And then the other thing is, their ad business is doing pretty amazingly right now. I mean, the search ad revenue is up 11%, and then their YouTube ad revenue is up 13%.

10:26I think YouTube might be the most under-hyped media asset in the world right now. I read recently it commands 9 % of TV screen time, which is more than any streaming service, including Netflix. So it's basically the world's greatest streamer. So, I don't know, I think Google might have been slightly overpunished on this one, and we'll see a comeback. I think you might be right. I would argue the valuations or the kind of increase in market capitalization that are inspired by AI may have peaked. If you look at kind of a big five, not even the Magnificent Seven, but five companies, I think it's Meta, Microsoft, NVIDIA, Tesla.

11:03Essentially, you have about$4 trillion in market capitalization increases since the beginning of the pandemic. And some of that is earnings increases, but most of it is multiple expansion. And what people or the markets are so inspired by is sort of AI inspired narrative. People are looking for reasons to love Microsoft right now because they say, wow, they have kind of shot ahead in terms of their investment in open AI and their ability to incorporate generative AI into products where they're not in the business of protecting a legacy business. And people are looking for reasons to beat down Alphabet, who is seen as been caught flat-footed.

11:39But if you look at the market capitalization gains in these companies, and I would argue reverse engineer to AI inspired increases in value, I think you could argue that AI or generative AI, the story has created more shareholder value in the last 24 months faster than any technology in history. Now, is it warranted or earned? We'll see. But if you look at the total number of startups in generative AI and how much money they've raised, they've raised about$200 billion at a valuation of approximately$1 trillion. So you could say, all right, startups have created$1 trillion in value if you market it where they've raised money.

12:17But that's dwarfed by the$4 trillion, an increase in market capitalization that's been garnered by companies like Tesla, who on the day they announced the Dojo supercomputer, which is supposedly an AI computer that will help figure out self-driving. That day, the excitement around that kind of AI narrative increases the market capitalization of Tesla by the value of BMW. When Microsoft announces they're incorporating AI into their Microsoft Office suites, they increase their market capitalization by the value of Disney. So AI is, at least from a perception standpoint, is the seminal breakthrough technology of at least the last decade, if not the last 25 years.

12:59We'll be right back after the break with a look at meta and snap earnings.

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14:16We're back with Prof. G Markets. Snap reported third quarter earnings that beat estimates. The company is back to sales growth after two straight quarters of declines. Revenue came in at$1.2 billion, up 5 % from a year ago, and shares initially popped more than 10%. The next day, however, Meta eclipsed those earnings, reporting third quarter revenue of, get this,$34 billion. That's up 23 % from a year ago, and it's the company's largest year-on-year sales growth since 2021. Scott, insane results from Meta. What's your reaction? This may be Netflix and Meta. Netflix also had a blowout quarter. They may have pulled off something that we haven't seen before in markets.

15:00I mean, definitely not in tech, but maybe even across markets historically. And that is these companies have managed to do pull off nearly the impossible. Typically, the best companies in the world make massive investments. Their costs go up. But they hit a point where their revenue growth acceleration is greater than their cost increases. But what happens when you have massive, right? massive increases in revenue. Meta increased their revenues 23%. That basically means every three and a quarter years, the company would double its revenues. And then usually in an amazing company like Meta, revenue up 23%, expenses up 18%, profits up 20 or 30%.

15:45But Meta actually reduced their headcount by 24 % and managed to increase revenues by 23%. So, Ed, what happens when you have the champagne and cocaine of massive revenue growth while you're cutting costs? you have a nitro and glycerin explosion in earnings the profits here in the third quarter doubled doubled and about i don't know nine twelve months ago everyone was saying that meta was running into problems and it was no longer the hot thing and oh my god i mean i don't think mark zuckerberg acquits him well in terms of his concern for the commonwealth or for or for our kids, but there's just no getting around it.

16:32This company has outstanding management when it comes to managing a business and making investments. This isn't, you know, drinking our chilies or red onion or whatever tacky place you take your dates at. This is drinking a cocktail at the polo lounge where daddy'll be tomorrow night and Saturday as he goes to LA for his favorite holiday. Hello, innovation called Halloween. Another story, Ed. Another story. I just don't think I've ever seen anything like this. Have you seen it in your 17 months in the professional world? No, this is the first time. And also, that profit, it more than doubled. It was up 164%.

17:12I also want to rewind to a year ago when Meta's ad sales were actually declining. And part of that was the macro environment. But we also wrote a post on this about how it was Apple that was hurting the business. And we specifically made the point that Apple had this privacy change that made it impossible for Facebook to track user data, which meant that you had bad targeting and just overall poor performance. And at that time, I talked to several friends who worked in e-commerce who told me that, yeah, my Facebook ads just don't work anymore because my customer acquisition costs are too high and I barely get any click through.

17:49Six months later, I checked in with these guys and I asked them, are you still having trouble with these Facebook ads. And they said, no, it's working now. I'm like, okay, well, what changed? They say, I don't know. But not only is it working, but it's working better than it was before Apple made that privacy change. So I was puzzling over this for a while. Turns out the solution was AI. And what Meta did was they pulled back from the metaverse and they quietly shifted literally billions of dollars of investment into AI. They created these dedicated AI teams. They built new algorithms that essentially overhauled the entire ad recommendation system.

18:25And they even created this AI ad tool called Advantage Plus, which basically automates the entire ad process for marketers. And now they're working on a generative AI product that's going to be geared specifically for advertising. So I think the learning here with Meta is, you know, we think of all these AI winners as the guys with the chatbots, like OpenAI, Microsoft. But I feel like we've massively underestimated the extent to which AI has totally transformed Meta's business in the face of Apple's privacy change. And then you look at all of their accomplishments this year, you know, threads, reels, cost cutting.

19:03I feel like you could make the case at this point that Mark Zuckerberg has been the most successful CEO of the year. Look, I hate to admit it, but you might be right. And again, see above$4 trillion of market capitalization inspired by AI. And AI is not only helping meta on the ad side and figuring out a workaround over kind of the Apple attempt to kick Zuckerberg in the nuts. It's also helping on the consumer side. And that is they are leveraging AI to create more engagement across reels within Instagram. Yeah, 40 % increase in time spent on Instagram because of reels. You're right. It's incredible what they've pulled off.

19:43They're, you know, they're mendacious fucks, but they're impressive mendacious fucks. And by the way, they mentioned AI 51 times on the earnings call. How many times did they mention the metaverse? God. Twice. Well, I don't know if you noticed, but Reality Labs, their sales fell 26 % year on year to 210 million. So this business is going away. They have lost$25 billion on the metaverse. I think they're effectively, I don't want to say they're getting out, but they're definitely rationalizing the investment. Although, as much as Apple hates the Zuck, specifically, I think Tim Cook really disdains them.

20:16Tim Cook is a quality person that recognizes people that aren't, and I think it really bothers him. The success that Zuck registers or the damage he's levying on the world. but what apple inadvertently did when it announced a headset for twenty five hundred dollars all of a sudden the meta headset came across as the old navy of technology old navy is arguably or is the most successful retailer of the last 50 years in that it was the company or this retailer that went from zero to a billion faster than any retailer in history and the old navy algorithm has always been a fantastic algorithm to remember in business and what was that old navy was going to be 80 % of the gap in terms of quality and merchandising and finishes and fabrics for 50 % of the price.

20:59And that cocktail, that cocktail, basically, if you think about Southwest Airlines and JetBlue, they were 80 % of American or Delta for a lot less money. That is an incredible cocktail for growing revenues really quickly. The same thing is true of the Oculus headset right now. And that is, I think, that the$2 ,500 announcement or the announcement of a$2 ,500 headset from Apple has actually brought kind of new value or perceived value to the Oculus headset. Anyways, distinct to that, there's nowhere to go with this stupid thing. There's more people going to, no joke, there's greater traffic, daily active users on MySpace than Horizons World or whatever it is they call that incel panic room.

21:42But I think slowly but surely, they're rationalizing their big gulp ayahuasca consensual hallucination around the metaverse. So let's talk about their nephew or their niece that's in the same family, but is... Yeah, we forgot about Snap. Yeah, working at the, you know, instead of running General Electric, you know, our cousin is a barista somewhere. Not that there's anything wrong with that. But just to give you a sense of just how the numbers we're talking about, Meta added the revenue of Snap just this quarter. Their quarterly increase, their year-on-year quarterly increase in revenues was bigger than Snap's entire business.

22:21And Snap is doing well. They grew 5 % after two consecutive quarters of declines, so that's nice to see them reverse the declines. And the platform saw a 12 % increase in daily active users, up to 406 million. And most of this growth came from outside of Europe and North America. Users outside of Europe and North America account for almost half of snaps daily active users of only 17 % of revenue. That was similar to or may still be similar to Facebook. Engagement on Snapchat increased, which is exciting for them. Users posted nearly three times more public stories posted in the U.S. compared to Q3 2022.

22:56But basically, these numbers are kind of, they're sort of a pimple on the elephant of social media. Now, granted, it's a very attractive pimple that my kids are obsessed with and they own a nice niche. but they're sort of you know it's right now it's meta in this space it's meta and the seven dwarves and snap is you know sleepy or dopey or tiny you know they're just they're just a cute little version of meta at this point and those growth numbers are i mean i don't understand why it got such a pop those those are lame-o numbers i mean five percent revenue growth and you compare it to meta and the whole business is up 25 and then that net loss which is bigger than last year i think was around, I think it's like a 5 % expansion in that net loss to$368 million, despite also laying off a fifth of the workforce.

23:45And meanwhile, they're still declining to offer any formal revenue guidance because their excuse is, you know, macro uncertainty. I just thought this was a kind of a giant dud. You're being a little harsh. Maybe this will convince you. Ready? So they lost almost$400 million. Their adjusted EBITDA was$40 million. Meanwhile, they paid employees$350 million in stock-based compensation. Is that sustainable? Well, they're being smart. They're like, our stock is down. I mean, I think their stock's off 90 % since it's high. So we want to keep people around. So let's shuffle out the door a bunch of options and tell everyone, hey, if we get the stock back to 50 % of where I was two years ago, you're going to make a shit ton of money.

24:29I think you have to do that. I think you have to keep your most talented people. Retention is the key to companies like this. The team with the best players wins. And I got to imagine that people at Snap get a lot of calls from a lot of different platforms. They have reversed the revenue declines. They have a very nice niche. It's a nice little company. We're now in an era of just big is not only better, but big is singular. Big is just kicking the shit out of the lower 90. I asked Aswath to motor in, I was at the Apollo conference this week and Aswath spoke. And I said, is this, if you will, the top 10%, the biggest companies aggregating all the increases in market capitalization?