#SocialStocks: Tracking the Latest News from Twitter After Musk’s Takeover

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Meta sinks and Pinterest rises following Q3 results, FCC commissioner calls for TikTok ban, and other notable stories from this week

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

CHIEF TWIT: 

The U.S. is exploring whether it has legal authority to review Elon Musk’s Twitter (TWTR) deal, which gives large foreign investors access to confidential data, The Washington Post’s Faiz Siddiqui, Jeff Stein, and Joseph Menn reported.

Twitter appears to be rushing out a “high”-risk “Paywalled Video” feature, The Washington Post’s Will Oremus and Gerrit De Vynck reported, citing an internal email. The feature would let users charge to view their videos, with Twitter taking a cut, according to the report. WaPo also reported that Musk said Twitter will not reinstate banned accounts “until we have a clear process for doing so, which will take at least a few more weeks,”

Major advertising agencies are watching the social media company very carefully as it falls under the helm of Tesla (TSLA) founder Musk, according to Lydia Moynihan, Theo Wayt and Thomas Barrabi, writing for the NY Post. “A ‘big four’ advertising agency has reportedly recommended clients ‘pause’ putting ads on the social media platform with others reevaluating their budgets and contemplating running ads elsewhere, if the “site becomes chaotic and unpredictable under Musk,” added the Post story. One such ad agency, Interpublic Group, or IPG (IPG), suggested to clients that they ‘pause placing ads on Twitter, said the NY Post. Other publicly traded companies in the ad space include Trade Desk (TTD) and WPP (WPP). General Motors (GM) suspended  its advertising on Twitter following Musk’s takeover, CNBC’s Michael Wayland and Lora Kolodny reported late last week. GM, a rival to Musk’s Tesla, said it is suspending advertising as it evaluates Twitter’s new direction. It will continue to utilize the platform to interact with customers but not pay for advertising, GM said. Twitter is seeking to reassure advertisers, writing to agencies that the company remains committed to ensuring their ads are not placed alongside harmful or offensive content, The Financial Times’ Tim Bradshaw, Alex Barker and Hannah Murphy reported on Friday, citing an email seen by the publication. Jonathan Greenblatt, CEO of the Anti-Defamation League, which led 2020’s Stop Hate for Profit campaign against Facebook, when dozens of brands pulled spending from the social network, commented that “Twitter has made some strides in tackling online hate and extremism in recent years, and so while we want to be cautiously optimistic about how Musk will run the platform, he has not demonstrated any focus on these issues to date. We worry that he could take things in a very different direction.”

Twitter will be ending the ability for subscribes of its paid Twitter Blue product to access ad-free articles from publishers, Alexandra Bruell of The Wall Street Journal reported, citing people familiar with the matter. Twitter Blue is a monthly subscription that offers premium features, such as accessing ad-free articles and the option to “undo tweet.” Twitter is also planning to raise the price of Twitter Blue to $19.99 from $4.99, according to an internal company correspondence viewed by the Journal.

Morgan Stanley (MS) and six banks plan to hold $12.7B in debt from Musk’s Twitter buyout until early 2023, pending a clearer business plan from Musk, The Financial Times’ Antoine Gara, Eric Platt, and Ortenca Aliaj reported. The group of lenders, which includes Bank of America (BAC) and Barclays (BCS), have conceded they will be stuck holding the debt on their books for months or even longer and will likely end up incurring huge losses on the financing package, according to the report.

Twitter said in a securities filing Monday that the nine members of its former board are no longer directors as of the consummation of the $44B merger, which closed last week. Musk, now the company’s CEO, is serving as Twitter’s sole director, according to the filing. Musk previously changed his Twitter bio to “Chief Twit” and said he had “no idea who the CEO is.”

Musk pulled over 50 Tesla employees, mostly Autopilot software engineers, two Boring Company employees, and one Neuralink employee to help at Twitter, CNBC’s Lora Kolodny reported. The employees have been authorized to do code reviews and more at the social network, Kolodny says, adding that Twitter employees say managers instructed them to work 12-hour shifts, seven days a week to hit Musk’s aggressive deadlines and that their jobs are at stake.

Former Twitter CEO Jack Dorsey agreed to roll over his remaining 2.4% stake in the company to Musk’s new holding company for Twitter, X Holdings I Inc., according to a regulatory filing. The value of Dorsey’s roughly 18M shares is just over $1B, according to the filing.

Twitter, froze some staff access to content moderation and policy enforcement tools, raising worries about a misinformation spike before the U.S. midterm elections, Bloomberg’s Kurt Wagner, Edward Ludlow, Jackie Davalos, and Davey Alba reported. According to people familiar with the matter, most people who work in Twitter’s Trust and Safety organization are currently unable to alter or penalize accounts that break rules around misleading information, offensive posts and hate speech. The most high-impact violations that would involve real-world harm have been prioritized for manual enforcement, the people noted. Yoel Roth, Twitter’s head of safety and integrity, responded to reports that the company has frozen some employee access to internal tools used for content moderation and other policy enforcement, by saying: “This is exactly what we (or any company) should be doing in the midst of a corporate transition to reduce opportunities for insider risk. We’re still enforcing our rules at scale.”

Musk has told the engineers at Twitter to come up with a rendition of the now defunct Vine app, wrote Axios. “Twitter shuttered the looping-video app in 2016 after acquiring it four years earlier, leaving loyal Vine fans dismayed,” added the story.

Musk has told the European Commission that Twitter will abide by strict European rules on illegal online content policing, Reuters’ Michel Rose reported, citing European Union sources. In an exchange last week, Musk told EU industry chief Thierry Breton that he intends to comply with the bloc’s Digital Services Act, which levies large fines on companies if they do not control illegal content, the author notes.

Musk plans to lay off 25% of Twitter’s workforce in the coming days, focusing on sales, product, engineering, legal, and trust and safety, The Washington Post’s Elizabeth Dwoskin and Faiz Siddiqui reported on Monday. Musk denied a New York Times report saying he was laying off Twitter employees to avoid stock grants. In response to a Twitter user asking about the matter, the executive said that, “This is false.”

Musk said via Twitter, “Twitter will be forming a content moderation council with widely diverse viewpoints. No major content decisions or account reinstatements will happen before that council convenes.”

In a regulatory filing, the New York Stock Exchange disclosed that it has notified the SEC of its intention to remove the entire class of Twitter securities from listing and registration on the Exchange at the opening of business on November 8. “The merger between Twitter, Inc. and X Holdings II, Inc., a wholly owned subsidiary of X Holdings I, Inc., wholly owned by Elon R. Musk became effective on October 27, 2022. Each share of Twitter, Inc. Common Stock was exchanged for USD 54.20 in cash, without interest and less any applicable withholding taxes. The Exchange also notifies the Securities and Exchange Commission that as a result of the above indicated conditions this security was suspended from trading before market open on October 28,” the filing stated. A post to the site of the NYSE showed that the exchange halted trading in shares of Twitter as of 3:50:45 on October 28, citing as a reason that its merger is effective.

FCC COMMISSIONER FLOATS TIKTOK BAN: 

Brendan Carr, one of five commissioners at the Federal Communications Commission, told Axios in an interview that he believes the Council on Foreign Investment in the U.S., or CFIUS, should take action to ban TikTok, using his “strongest language” to date to urge action on TikTok, reported Axios’ Bethany Allen-Ebrahimian. Companies that compete with TikTok for advertising dollars include Meta Platforms’ (META) Facebook and Instagram, Alphabet’s (GOOGL) Google and YouTube and Snap’s (SNAP) Snapchat. Shares of Meta were up $3.71, or 4%, to $96.87 and those of Snap were up 60c, or 6%, to $10.51 yesterday afternoon. “Commissioner Carr has no role in the confidential discussions with the U.S. government related to TikTok and appears to be expressing views independent of his role as an FCC commissioner,” a TikTok spokesperson told Axios in a statement after Brendan Carr, one of five commissioners at the FCC, said in an interview that he believes the Council on Foreign Investment in the U.S., or CFIUS, should take action to ban TikTok.

EARNINGS RECAP: 

Meta Platforms’ shares plummeted following its third quarter earnings report last week. Facebook DAUs were 1.98B on average for September, up 3% year-over-year. Results for the company were mixed, but the social media giant noted a 7% headwind for Q4. Meta Platforms said: We expect fourth quarter 2022 total revenue to be in the range of $30-32.5 billion. Our guidance assumes foreign currency will be an approximately 7% headwind to year-over-year total revenue growth in the fourth quarter, based on current exchange rates. To provide some context on the approach we are taking towards setting our 2023 budget, we are making significant changes across the board to operate more efficiently. We are holding some teams flat in terms of headcount, shrinking others and investing headcount growth only in our highest priorities. As a result, we expect headcount at the end of 2023 will be approximately in-line with third quarter 2022 levels. We have increased scrutiny on all areas of operating expenses. However, these moves follow a substantial investment cycle so they will take time to play out in terms of our overall expense trajectory. Some steps, like the ongoing rationalization of our office footprint, will lead to incremental costs in the near term. This should set us up well for future years, when we expect to return to higher rates of revenue growth. We expect 2022 total expenses to be in the range of $85-87 billion, updated from our prior outlook of $85-88 billion. This includes an estimated $900 million in additional charges related to consolidating our office facilities footprint that we expect to record in the fourth quarter of 2022. We anticipate our full-year 2023 total expenses will be in the range of $96-101 billion. This includes an estimated $2 billion in charges related to consolidating our office facilities footprint. We expect the slight majority of our 2023 expense dollar growth to be driven by operating expenses, with the remaining growth coming from cost of revenue. We expect the percentage growth rate of 2023 operating expenses to decelerate meaningfully as we curtail non-headcount related expense growth and keep 2023 headcount roughly flat with current levels. Conversely, our growth in cost of revenue is expected to accelerate, driven by infrastructure-related expenses and, to a lesser extent, Reality Labs hardware costs driven by the launch of our next generation of our consumer Quest headset later next year.” The company noted that it expects 2022 capital expenditures of $32B-$33B. Shares were down as much as 25% in the wake of Meta’s Q3 report. The quarter was bad, though arguably not as horrible as Wall Street feared, Eric J. Savitz wrote in this week’s edition of Barron’s. The shares closed down 25% on Thursday, triggered by Meta’s latest spending plans, the author noted. Zuckerberg said most of the spending is targeted at building data centers to drive initiatives in artificial intelligence that will be used to improve targeting of content and advertising. He thinks the investments will pay off over time, and maybe they will. But the Street’s view is that Meta’s enormous outlays are out of control, Savitz writes. There are things that Meta could do that would instantly push the stock higher. While it would hardly be a cure-all, Meta could drive its stock appreciably higher by announcing that it was pulling back on development of the metaverse and limiting its focus to gaming, where the metaverse actually has some promise, the publication added.

Pinterest (PINS), on the other hand, surged following its Q3 earnings release. The company also noted a likely foreign exchange headwind in Q4. “Our current expectation is that Q4 2022 revenue will grow mid-single digits on a year-over-year percentage basis, which takes into account slightly greater foreign exchange headwinds than in Q3 2022. We expect our Q4 2022 non-GAAP operating expenses to grow low double digits percent quarter-over-quarter.”

ANALYST COMMENTARY: 

Edward Jones analyst David Heger downgraded Meta Platforms to Hold from Buy following the Q3 earnings report. While Meta is executing relatively well in the difficult macroeconomic environment and continues to steadily grow users across its platforms, Heger is concerned about how long the growing metaverse investment will take to deliver a sufficient return, the analyst told investors in a research note. Better-than-expected results or a decline in the metaverse investment could be positive for shares, but Heger feels shares are appropriately valued given the uncertainty of both.

Stifel analyst Mark Kelley called the Q3 report from Pinterest “a rare bright spot thus far through earnings season,” highlighting the company’s stabilizing user base, positive engagement trends and an outlook for Q4 that was “also slightly ahead of the Street.” Though management’s noting that October is tracking to the low-end of the guidance range may “cause some to worry a bit,” he notes that the team believes the back-ended nature of the quarter should advance the business and that the company continues to expect margin improvement in 2023, said Kelley. He maintained his rating on Pinterest shares, arguing its appropriate to stay on the sidelines as he weighs “what appears to be near-certain margin improvement story relative to an environment where ad budgets are increasingly under the microscope.”

Tigress Financial analyst Ivan Feinseth lowered the firm’s price target on Meta Platforms. The analyst cites a re-rating of valuation but views the recent pullback in price as a major buying opportunity as total daily and monthly active users continue to grow, and the Metaverse will emerge as a long-term growth driver. Feinseth also believes that increasing strength in Reels, Messenger, and WhatsApp will continue to accelerate Business Performance trends, and ongoing Metaverse investment and development will drive significant long-term shareholder value creation.

Piper Sandler analyst Thomas Champion lowered the firm’s price target on Pinterest and kept his rating on the shares following the Q1 results. The company’s monthly active users were again lower, but the smallest quarter-over-quarter decline since Q2 of 2021 and we’re one quarter away from an easier Q3 compare, Champion tells investors in a research note. The analyst sees this as a “constructive quarter for Pinterest, rest, with clearer messaging and likely one quarter closer to a turn in the user trajectory.”

Originally Posted November 2, 2022 – #SocialStocks: Tracking the lasest news from Twitter after Musk’s takeover

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