HOT AIR BALLOON FLIGHT

By Julia Horowitz • Thursday, February 3

Good morning. In today's newsletter: Investors are dumping Facebook's stock after the company's latest earnings report. Plus, the Bank of England is two steps ahead of the Federal Reserve, and the titans of Wall Street are getting huge paychecks.

 

US stock futures are lower as Facebook drags down the tech sector. Markets in Europe fell in early trading, while stocks in South Korea and Japan were mixed.

 

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MARKET FLASH

Why Facebook's stock is imploding

Competition from TikTok. A stagnant user base in key markets. A pricey bid to invest in virtual reality that could take years to pay off. 

 

These are just a few reasons investors are dumping Facebook's Meta after a disastrous earnings report, which could wipe more than $200 billion off the company's market value.

 

What's happening: Meta said after markets closed on Wednesday that its profits fell during the final three months of 2021 as the social media company invested heavily in technology it needs to ramp up its offerings in the "metaverse," which it sees as the future of its business.

 

Its shares are down more than 22% in premarket trading, dragging other tech companies down with it. Snap and Pinterest, which report earnings Thursday, are 16% and 8% lower, respectively.

Breaking it down: There's a laundry list of reasons why Meta's earnings delivered a reality check for Wall Street.

 

CEO Mark Zuckerberg said that competition from rival TikTok, whose short-form video product is more popular than Meta's, is weighing on the company's ability to monetize its Reels product.

 

"We face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there," Zuckerberg said on a conference call with analysts.

 

Monthly active users of Facebook also stagnated versus the previous quarter at 2.91 billion, while daily active users in the United States and Canada dropped. And Meta reported slowing growth in its core advertising business, which still makes up around 99.5% of its total revenue.

 

Yet the biggest shock may have come from Zuckerberg's wishy-washy assessment of the company's outlook as Meta pumps billions of dollars into augmented and virtual reality.

 

"This fully realized vision is still a ways off," he said. "And although the direction is clear, our path ahead is not yet perfectly defined."

 

UBS analysts Lloyd Walmsley, Chris Kuntarich and Mary McKennon had this to say in response: "Indeed."

 

"We were struck by the magnitude of priorities the company is juggling concurrently (seven?), most of which do not appear likely to drive a near term improvement to the revenue outlook," they wrote in a note to clients.

 

That stands in contrast to rival tech behemoths Apple, Amazon and Google, which have in recent years generated significant revenue from newer parts of their businesses.

 

The analysts also expressed deeper concerns about Facebook's future. They pointed to a "world broadly moving away from Meta's strengths, as content consumption shifts towards creator content and private messaging and away from public sharing, effectively eroding the company's moats."

 

On the radar: Facebook isn't the only tech firm whose stock is getting hammered in part because of questions about its user base.

 

Shares of PayPal's stock plummeted 25% on Wednesday after the payments firm, an early pandemic darling, ditched its goal of developing a user base of 750 million. And Spotify just reported a lukewarm forecast for its subscriber growth this quarter, sending its stock down 10% in premarket trading.

VOICES

Spotify CEO addresses Joe Rogan controversy

"We're trying to balance creative expression with the safety of our users. And of course, this is a very complicated issue."

 

 

Read more from CNN Business.

EYE ON EUROPE

The Bank of England is two steps ahead

The Federal Reserve is looking to hike interest rates for the first time since the pandemic started when it meets in March. But the Bank of England isn't waiting around.

 

The latest: The central bank increased interest rates for the second time since December on Thursday in a bid to fight surging prices. It hasn't raised rates at two meetings in a row since 2004.

 

The Bank of England set its bank rate at 0.5% as it predicted that inflation — which rose at its fastest clip in 30 years in December — would continue to climb until April, when it would peak at 7.25%.

 

That month, consumers face a sharp rise in costs when a cap on energy prices will be raised and taxes are hiked. Energy bills for the typical household are increasing by £693 ($939) to £1,971 ($2,670) per year.

 

Across the Atlantic: St. Louis Federal Reserve President James Bullard told Reuters this week that he supports the Fed hiking interest rates at its March, May and June meetings, but emphasized that the outlook remains very uncertain.

 

"We are going to have to be more nimble, faster, better at reacting to inflation data and other developments as we go through this year," Bullard said. "It's going to be a more data-dependent environment."

UP NEXT

Biogen, Eli Lilly, Estee Lauder, Hershey, Honeywell, Merck and Vista Outdoor report results before US markets open. Activision Blizzard, Amazon, Clorox, Ford, News Corp., Pinterest and Snap follow after the close.

Also today →
▸ US jobless claims for last week post at 8:30 a.m. ET.

▸ The ISM Non-Manufacturing Index for January, which tracks the US services sector, follows at 10 a.m. ET.

 

Coming tomorrow: The latest US jobs report is expected to show that 150,000 positions were added in January, compared to 199,000 in December.

WHAT WE'RE READING AND WATCHING

▸ Natural gas spikes 16% ahead of winter storm (CNN Business)
▸ Shell ends 2021 on a high note as profits soar (Reuters)
▸ Google vanquished a rival in Prague. Payback could hurt (NYT)
▸ CNN president resigns over relationship with exec (CNN Business)
▸ OPEC pledges to pump more oil. Will it deliver? (CNN Business)
▸ Pfizer's image soars after Covid-19 vaccine breakthrough (Axios)

FINAL WORD

The titans of Wall Street are getting huge paychecks

Big Wall Street firms enjoyed a stellar 2021 thanks to a booming stock market and a spree of mergers and acquisitions and initial public offerings. Now, bankers and CEOs are reaping the rewards, my CNN Business colleague Paul R. La Monica reports.

 

Goldman Sachs announced in its fourth quarter earnings report last month that it set aside $17.7 billion for compensation expenses last year, an increase of 33% from 2020. Morgan Stanley said its compensation expenses were up nearly 20% in 2021.

 

Remember: Compensation consulting firm Johnson Associates predicted in November that Wall Street bonuses would hit their highest levels since 2009 for many on Wall Street thanks to what the firm described as a "scorching IPO market" and "robust M&A activity."

 

And while plenty of employees are cashing in, CEOs are at the top of the pile.

 

Goldman Sachs CEO David Solomon took home $35 million in compensation in 2021. That's up from $27.5 million in 2020. Morgan Stanley CEO James Gorman received a $35 million pay package last year, up from $33 million in 2020. And JPMorgan Chase's longtime chief Jamie Dimon got a $3 million raise to $34.5 million.

 

It could be another solid year for banks as interest rates begin to rise, allowing companies like JPMorgan to make more money off their lending business. The KBW Bank Index has risen almost 5% year-to-date. But market volatility as the Fed changes gears could cool dealmaking, which would set back investment banks like Goldman Sachs.