Disappointing Meta Earnings Sends Shudders Through Stock Market
Tech stocks have been ‘priced way beyond perfection’ and now face scrutiny as interest rates are poised to rise.
3 min
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Facebook’s parent company shed more than $230 billion in market value Thursday, a one-day loss that is the biggest ever for a U.S. company and increases pressure on a stock market long powered by technology shares.
Meta Platforms Inc. (formerly known as Facebook Inc.) gave a disappointing financial forecast, helping the major indexes snap a four-session winning streak. The tech-heavy Nasdaq Composite index dropped 3.7%, its worst day since September 2020, while the S&P 500 fell 2.4%.
PayPal Holdings Inc. and Spotify Technology SA also spooked investors in recent days, when the payments giant lowered its 2022 profit outlook and the streaming company elected not to provide annual guidance. Both companies suffered sharp drops in their stock prices.
The setbacks reflect the increased scrutiny companies are under as major U.S. stock indexes remain near record highs and the Federal Reserve is preparing to raise interest rates for the first time since 2018. Rising rates tend to reduce the multiples that investors are willing to pay for a share of company profits, a trend that stands to mean pain for stocks already trading at lofty valuations. That has put heightened pressure on the companies to show their financial results justify their price tags. In recent days, several have fallen short, raising concerns among investors that further declines in major indexes could lie ahead.
“The level of forgiveness has gone down,” said Daniel Genter, chief executive and chief investment officer at RNC Genter Capital Management. “When boards come to their shareholders to confess their sins, they’re just not going to be pardoned with one Hail Mary.”
The Facebook parent company surprised investors with a deeper-than-expected decline in profit and a downbeat outlook. The company said it expects revenue growth to slow and shared that it lost about one million daily users globally. Shares declined 26%, their worst daily performance since they started trading in 2012.
The company’s challenges include a new ad-privacy policy from Apple Inc. that Meta expects to cost it more than $10 billion in lost sales for 2022. The requirement that apps ask users whether they want to be tracked limited the ability to gather data used to target digital ads, driving advertisers to change their spending.
Meta’s $232 billion drop in market value exceeds the record that Apple Inc. set in September 2020 when the iPhone maker lost about $182 billion in a single day, according to Dow Jones Market Data.
Some strategists said the recent slide in shares of speculative tech companies should serve to remind investors that a robust market rally relies on advances by a variety of stocks. And they warn they expect more big stock swings ahead at any hint of slowing growth.
“The market can’t just be driven by a small number of megacap companies or tech companies,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “There should start to be more of a recognition that it’s not going to be technology that leads us out of this pullback.”
Earnings season had been overshadowed until recent days as investors fretted over the Fed’s plans to raise rates. They sold stocks across sectors, helping to send the S&P 500 down 5.3% in January, its worst monthly performance since the March 2020 slump.
Results out of the tech segment haven’t been all bad. Google parent Alphabet Inc. reported robust sales growth and unveiled plans for a stock split this week, helping the company add more than $135 billion in market value Wednesday. And Amazon.com Inc. said after Thursday’s closing bell that profits nearly doubled in the holiday period, helping send its shares up about 15% in late trading.
Shares of Snap Inc. and Pinterest also got a big bump after hours. Snap posted its first quarterly profit, and Pinterest said it expects first-quarter revenue to grow sharply. All three stocks had declined in the regular session ahead of the reports.
Meta, PayPal and Spotify entered 2022 at rich valuations. While the S&P 500 ended December trading at 21.5 times its projected earnings over the next 12 months, Meta was trading at 23.6 times, PayPal at 36 times and Spotify at 543.9 times, according to FactSet. Spotify isn’t an index constituent. By Thursday, Meta’s multiple had pulled back to 18 times forward earnings, while PayPal traded at 25.6 times. Spotify, meanwhile, traded at 666.2 times, after analysts cut their earnings forecasts.
“Those stocks were really priced way beyond perfection,” Mr. Genter said. “People are saying, well, guess what, perfection is not here.”
PayPal lowered its profit outlook for 2022 and abandoned a target it set last year of roughly doubling its active user base. Executives said business this year will be pressured by forces including inflation, supply-chain problems, the Omicron variant and the runoff in government stimulus. Shares slumped 25% Wednesday in their worst selloff on record and continued sliding Thursday.
And Spotify, which is embroiled in a controversy over Joe Rogan’s podcast, said it added users but declined to give annual guidance, pulling shares down 17% on Thursday.
Broadly, the corporate earnings season has surpassed expectations. With results in from about half the constituents of the S&P 500, analysts estimate that profits from index constituents rose 29% in the holiday quarter from a year earlier, according to FactSet. That is up from forecasts for 21% growth at the end of September.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Investors are taming impulsive money moves by adding a little friction to financial transactions
4 min
To break the day-trading habit that cost him friendships and sleep, crypto fund manager Thomas Meenink first tried meditation and cycling. They proved no substitute for the high he got scrolling through investing forums, he said.
Instead, he took a digital breath. He installed software that imposed a 20-second delay whenever he tried to open CoinStats or Coinbase.
Twenty seconds might not seem like much, but feels excruciating in smartphone time, he said. As a result, he checks his accounts 60% less.
“I have to consciously make an effort to go look at stuff that I actually want to know instead of scrolling through feeds and endless conversations about stuff that is actually not very useful,” he said.
More people are adding friction to curb all types of impulsive behaviour. App-limiting services such as One Sec and Opal were originally designed to help users cut back on social-media scrolling.
Now, they are being put to personal-finance use by individuals and some banking and investing platforms. On One Sec, the number of customers using the app to add a delay to trading or banking apps more than quintupled between 2021 and 2022. Opal says roughly 5% of its 100,000 active users rely on the app to help spend less time on finance apps, and 22% use it to block shopping apps such as Amazon.com Inc.
Economic researchers and psychologists say introducing friction into more apps can help people act in their own best interests. Whether we are trading or scrolling social media, the impulsive, automatic decision-making parts of our brains tend to win out over our more measured critical thinking when we use our smartphones, said Ankit Kalda, a finance professor at Indiana University who has studied the impact of mobile trading apps on investor behaviour.
His 2021 study tracked the behaviour of investors on different platforms over seven years and found that experienced day traders made more frequent, riskier bets and generated worse returns when using a smartphone than when using a desktop trading tool.
Most financial-technology innovation over the past decade focused on reducing the friction of moving money around to enable faster and more seamless transactions. Apps such as Venmo made it easier to pay the babysitter or split a bill with friends, and digital brokerages such as Robinhood streamlined mobile trading of stocks and crypto.
These innovations often lead customers to trade or buy more to the benefit of investing and finance platforms. But now, some customers are finding ways to slow the process. Meanwhile, some companies are experimenting with ways to create speed bumps to protect users from their own worst instincts.
When investing app Stash launched retirement accounts for customers in 2017, its customer-service representatives were flooded with calls from panicked customers who moved quickly to open up IRAs without understanding there would be penalties for early withdrawals. Stash funded the accounts in milliseconds once a customer opted in, said co-founder Ed Robinson.
So to reduce the number of IRAs funded on impulse, the company added a fake loading page with additional education screens to extend the product’s onboarding process to about 20 seconds. The change led to lower call-centre volume and a higher rate of customers deciding to keep the accounts funded.
“It’s still relatively quick,” Mr. Robinson said, but those extra steps “allow your brain to catch up.”
Some big financial decisions such as applying for a mortgage or saving for retirement can benefit from these speed bumps, according to ReD Associates, a consulting firm that specialises in using anthropological research to inform design of financial products and other services. More companies are starting to realise they can actually improve customer experiences by slowing things down, said Mikkel Krenchel, a partner at the firm.
“This idea of looking for sustainable behaviour, as opposed to just maximal behaviour is probably the mind-set that firms will try to adopt,” he said.
Slowing down processing times can help build trust, said Chianoo Adrian, a managing director at Teachers Insurance and Annuity Association of America. When the money manager launched its online retirement checkup tool last year, customers were initially unsettled by how fast the website estimated their projected lifetime incomes.
“We got some feedback during our testing that individuals would say ‘Well, how did you know that already? Are you sure you took in all my responses?’ ” she said. The company found that the delay increased credibility with customers, she added.
For others, a delay might not be enough to break undesirable habits.
More people have been seeking treatment for day-trading addictions in recent years, said Lin Sternlicht, co-founder of Family Addiction Specialist, who has seen an increase in cases since the start of the pandemic.
“By the time individuals seek out professional help they are usually experiencing a crisis, and there is often pressure to seek help from a loved one,” she said.
She recommends people who believe they might have a day-trading problem unsubscribe from notifications and emails from related companies and change the color scheme on the trading apps to grayscale, which has been found to make devices less addictive. In extreme cases, people might want to consider deleting apps entirely.
For Perjan Duro, an app developer in Berlin, a 20-second delay wasn’t enough. A few months after he installed One Sec, he went a step further and deleted the app for his retirement account.
“If you don’t have it on your phone, [that] helps you avoid that bad decision,” he said.
Content moderation rules used to be a question of taste. Now, they can determine a service’s prospects for survival.
