Pro Perspectives 4/24/24





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April 24, 2024

We had Meta earnings after the close today.  They grew revenues by 27% compared to the same quarter last year.  They grew net income by 114%.  And they expanded operating margins from 25% to 38%.  
Sounds quite good.  But the stock was crushed in after-hours trading.
The "sell" algorithms were assumably triggered by 1) Meta's guidance for the next quarter, which will be relatively flat quarter-to-quarter revenue growth, and 2) their plan to spend more than they originally guided in capex for the year.
On the former, keep in mind, Meta has rolled out its new large language model across its family of apps, and has yet to attempt to monetize it (which will be a fresh revenue growth catalyst, along with other AI products).  
On the latter, the capex spend is a continued massive investment in infrastructure to support AI.  The top end of this year's guidance will put them at $100 billion worth of investment over the past three years on: data centers, servers and network infrastructure.
Meta's goal is to be the leading AI company in the world.  And the bigger the spend, all funded by cash flow, the more dominant their position in AI is assured. 
With that, we'll hear from Microsoft and Google tomorrow.  They too will report massive investments in AI infrastructure and new product development. 
For these companies, the Wall Street scrutiny over "mid-points of guidance" and such, on the quarter, is a meaningless exercise.  
These earnings calls from the big tech giants are about discovery.  What are they learning?  What are they building?  How fast is the technology revolution progressing?  And how do they see it unfolding?  
In a lot of ways, this reminds me of the Q3 earnings season, back in October.  The tech giants were putting up big numbers.  It was hard to find something to be disappointed about, with how they were performing and reorienting their businesses around generative AI.  But the stocks were being sold. 
Broadly, stocks were in a correction at that time, driven by a Fed that had spent the prior few months reupping threats of more tightening.  And that had sent the 10-year yield surging to 5%
Stocks bottomed the week of big tech earnings, and on the day of the PCE (inflation) report
That PCE report showed a continued decline in the rate of inflation.  And with that, given that the 10-year yield was at a very restrictrive level and stocks were in a correction, the Fed signaled the end of the tightening cycle.  
Fast forward to today, and we're in a stock market correction.  The 10-year yield has had another sharp rise, trading last week to the highest level since early November of last year (4.7%).  And we get the PCE report on Friday. 
For perspective, core PCE is almost a percentage point lower than it was last October when the Fed signaled the end of the tightening cycle.  Rates are more restrictive today, than last October.