Meta Has an AI Hit. Why Are Investors Still Worried?

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Thursday, October 22nd. In today's episode, we'll break down Tesla's earnings and why Wall Street is punishing Elon for spending less money. We'll also get into Meta's earnings and why investors are running out of patience with Zuck. Then stick around to the end of the show to find out why Adidas' billion dollar World Cup marketing spend was totally worth it we got a great show for you today let's go stocks climbed for the third straight day on wednesday the s&p 500 gained 0.6 percent while the nasdaq jumped by 1.1 percent with tech being the best performing sector because of spacex earnings giving ai stocks a boost as spacex reported a massive growth in their ai revenues yesterday and their stock jumped 7.8%. We broke down those numbers on yesterday's show. So go check that out if you missed it. I got to say, though, we're still in this weird spot right now when it comes to the AI trade. The growth is clearly there, but investors are paying more attention to how much debt companies are taking on to fund it. SpaceX is a great example of that. There was a really interesting breakdown from Bloomberg's John Arthur in his newsletter. He said that trading volume for credit default swaps tied to the 10 major cloud and chip companies reached $140 billion through September. For some context, that was $17.7 billion during the same period last year. Now, for anyone that's seen the big short, you already know that credit default swaps are basically a way for investors to buy protection in the case a company doesn't repay its debt. It's almost like an insurance policy. So the fact that trading volumes for that insurance policy has gone up 7x over the past year, that tells you that investors are starting to hedge a bit. In fact, the costs of protecting against defaults have reached record high for some of these companies like CoreWeave and even some of the big AI companies. Now, to be fair, this doesn't automatically mean that all these companies are in financial trouble. I think the big tech companies will be fine, but I'm definitely going to be paying closer attention to the credit default swap market moving forward. The next 10 days could really set the mood, though, because we are getting more big tech earnings next week there's also a fed meeting next week so we're going to be staying on top of all of that if you're new here you picked a great time to start listening to the podcast definitely get subscribed if you haven't already and tune in every day to stay in the loop let's run through some headlines starting with Tesla Tesla reported earnings last night and it was kind of a mixed bag revenues were basically flat at $28 billion. Automotive revenues fell by 3% and energy revenue actually dropped by 16%. For the quarter, adjusted earnings came in at 48 cents a share. Wall Street was expecting 43 cents. So that was a small earnings beat, but they're not exactly a company right now firing on all cylinders or whatever the electric version of that is. You know, I thought Tesla might see a bump in their car sales because of higher gas prices, but that wasn't really the case. The bright spot on the earnings, though, was paid subscribers for full self-driving. Full self-driving is a service that costs $99 a month that essentially allows a Tesla to drive by itself. Active FSD subscriptions hit 1.74 million. That's up 67% from a year ago. And the company also said that a record 75% of new deliveries in North America came with FSD attached. So this could be a sign that people are starting to buy a Tesla just for the FSD. But FSD still isn't big enough to make a meaningful dent in the company's financials. You know, Tesla's big bets right now are on robo-taxis and their Optimus robots. Tesla continued to hype up the progress of robo-taxis. They're expanding to new cities. They're also working on the Optimus robot. But investments in those areas took a bite out of Tesla's operating profits, which fell by 56% in the third quarter. And the company didn't give any color on when these business segments would start generating meaningful revenue or profit. And what's even more confusing is that Tesla said they were reducing their CapEx spending. For the third quarter, Tesla spent $4.7 billion on CapEx. Wall Street was expecting almost $8 billion in spending, so that was a surprise. And then Tesla said they're cutting their full-year CapEx spending plan to about $20 billion, down from more than the $25 billion they previously expected. Normally, Wall Street likes it when a company spends less and keeps more cash, but Tesla is being valued as an AI company. So a reduction in capex could be a sign the company is slowing down development, which could lead to delays of their Optimus robot or their Cybercabs. In fact, Elon Musk even admitted on the earnings call that Optimus still is having problems with the AI, the reliability, even the hands, and that those won't be solved until the end of next year. Tesla stock was down more than 4% in pre-market trading. It seems to have pared back some of those losses. It's still down around 2% at the time of this recording. But here's the thing, Tesla still trades at close to 200 times forward earnings, which continues to blow my mind, especially when you see companies like Meta and Nvidia trading under 20 times forward earnings. So at some point, Tesla is going to have to deliver on their moonshot promises to justify their valuation. The surge in FSD subscribers is an encouraging development, but it's still not enough, in my opinion, to justify the valuation. And this is coming from someone who owns a Tesla, even though my Tesla is kind of old, so I don't get the new FSD, which is kind of a bummer. I'm not gonna lie, if I wasn't working from home most of the time and I had to drive a lot more, I would seriously consider upgrading to the newer model of a Tesla just so I can get the latest FSD. So again, the car is great. I just still can't justify the valuation. Now, speaking of Meta, they also reported earnings last night and the market reaction has been pretty wild. Meta's revenues in the third quarter grew 26% to $64.6 billion. That was higher than expected and it marks the 17th straight quarter of beating on the top line. Earnings per share came in at $3.83, but that did include a $9.9 billion legal charge from their teen safety settlement from a few weeks ago. If you take that charge out, Meta says their earnings would have been $7.40, which is well above the estimates. And then finally, Q4 revenue guidance came in at $73 to $76 billion. That was also above expectations. You know, Meta's core business continues to hum along. meta says their apps reach 3.64 billion daily users that's up three percent and absolutely crazy when you think about it pretty much half the people in the world are using a meta app every single day and meta continues to monetize all their eyeballs their ad impressions were up 10% in the third quarter i feel like meta is starting to increase the number of ads on their apps to squeeze as much revenue as they can from their existing business because they continue to a ton of money on AI. Meta raised their capital spending forecast to be between $135 and $145 billion for the year. In fact, Meta is literally spending every dollar they bring in. Free cash flow for the third quarter was negative $2.1 billion. And because of that, the company is starting to take on more debt. Long-term debt was up to $81 billion, up from the $59 billion a year ago now initially meta stock popped like five percent after the earnings but it's given all that back and then some shares are actually down more than five percent at the time of this recording and if you zoom out meta stock has dropped more than 15 percent from their post news high from back in late september you know this kind of goes back to what i said earlier in the episode what i've been talking about for the last couple weeks investors are taking the ai debt stuff a lot more seriously now let's talk more about Meta CEO Mark Zuckerberg talked about it on the earnings call saying that 10 million people have used their AI app in the U.S. and Canada in the first six weeks. Muse is now the fastest growing AI app since ChatGPT. And what I found to be interesting is that Zuck said the top use case for Meta AI is shopping. So the company seems to have a clear product market fit and they're working to scale it up. Here's the problem though. Muse still requires a ton of compute. So the more people using Muse is going to increase the cost for Meta. Now, I'm not going to lie to you guys. Coming into the earnings, I thought that Zuck might have bought himself some time with Wall Street because of the early success of Muse. Now, I thought Wall Street would be a bit more forgiving and let him figure out how to monetize it, but investors might not be so patient after all. By the way, I'm still using Muse every single day, and it's not because Meta is one of my largest holdings in my portfolio. In fact, all my Muse usage is probably costing the company money. Maybe I should buy a premium subscription just to kind of help out their revenue numbers. Let's talk about some stocks making moves today. Spotify stock is rallying this morning. It's actually one of the few stocks in the green today after the streaming company reported solid earnings and gave investors an encouraging profit forecast. Revenues in Q3 grew 16% to 5 billion euros. That slightly missed expectations, but paying subscribers reached 306 million. That was a million more than what Spotify had previously forecasted and overall total monthly users have now hit 788 million but what really had investors excited was the company's profit outlook spotify expects fourth quarter operating income to jump to 820 million euros which is way higher than wall street had expected and the company also expects to add another 10 million paid subscribers in q4 see one of the concerns that wall street had about spotify was how much money the company was spending on ai features like their AI DJ. But Spotify now said that those AI costs have come down and that AI investment is paying off because of increased engagement and people are staying on the platform and listening longer. So Spotify might be a sneaky AI winner. The market seems to love it. Spotify stock is up around 5% this morning in reaction to the earnings. But if you zoom out, though, Spotify stock was down close to 10% on the year coming into this earnings report. So maybe this earnings report sparks a turnaround. Now on the flip side, IBM stock is sliding this morning, despite the company beating third quarter expectations on both top and bottom line. Revenues in the third quarter grew to about 5% to $17.1 billion, with software sales up 8%. IBM also increased their free cash flow outlook, but none of that was enough to satisfy investors. I think investors are still looking for proof that the company has moved past their brutal second quarter earnings when their large mainframe deals were delayed. If you guys remember back in July, IBM pre-announced a bad second quarter and the stock dropped 25% in a single day. It was their worst day ever as a company. I think the third quarter was supposed to be the comeback quarter. And based on the numbers, it wasn't enough for investors to feel confident in the company yet. You know, IBM did say that two thirds of those delayed deals in the second quarter did close during the third quarter, but I don't know, the market isn't ready to buy in yet. And that's why shares of IBM are down around 5% this morning, the reaction to the earnings. And if you zoom out, the stock has dropped 13% on the year. I'll be honest with you guys. The fact that IBM is still kicking it worth over 200 plus billion dollars, even though they're one of the oldest tech companies in the world, that's pretty impressive. I mean, I don't really understand why companies are still using IBM mainframes, but they're still doing their thing. You know, let's wrap the show with a fun fact. adidas spent about a billion dollars marketing around the world cup this summer and it looks like all that marketing paid off see when adidas or adidas for my european listeners out there told investors back in july they spent a billion dollars in the world cup the market kind of panicked their stock dropped like 12 percent in a single day i think investors were skeptical that all that money being spent on jerseys and fan events and commercials with Lionel Messi and Timothy Chalamet would be worth it now the ceo of adidas defended all the spending at the time saying that it would eventually pay off and he could take a victory lap because Adidas released preliminary results and they showed that quarterly revenues were up nine percent to a record 7.25 billion euros and operating profits also hit a record high climbing 37 percent to just over a billion euros now before we give Messi and Timothy Chalamet all the credit i should mention that Adidas received roughly 200 million euros in U.S. tariff refunds which helped boost their profits but still their business is doing great and i can't help but think that this has to be more salt in the wound to Nike because their revenues were down four percent in their latest quarter i mean this just goes to show you that not all legacy shoe and apparel companies are struggling right now it just seems to be a Nike problem by the way i am looking to buy some shoes right now my last shoes are about to fall apart if you guys have any recommendations for me let me know i I personally prefer the slip-on kind of shoes. I know I'm old, but that's what I like to wear at this point. So if you have any recommendations, drop them in the comments on Spotify and YouTube. Well, all right, guys, that's the rundown for today. Hope you guys enjoyed today's episode. Thank you guys so much for listening, watching, and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys back here tomorrow.