Meta Platforms' blowout earnings have me as bullish as ever; Why I would avoid long-term bonds; Pershing Square USA pulls its IPO
1) Meta Platforms (META) just reinforced why I continue to love its stock...
For more than five years, it has been one of my three favorite tech giants – along with Amazon (AMZN) and Alphabet (GOOGL).
And yesterday, it reported blowout second-quarter earnings. (You can see the full earnings release here and investor presentation here).
Revenue jumped 22% year over year ("YOY"), driven, first, by more users of Meta's family of apps: "family daily active people" rose 7% YOY to 3.27 billion.
That's a staggering number...
There are about 8 billion people on Earth, of whom 75% (or 6 billion) are age 15 or older... so that means Meta is reaching more than half of the world's adult population every day.
Then, Meta fed them a few more advertisements, as "ad impressions delivered" rose 10% YOY.
Finally, Meta was able to charge a 10% higher average price per ad than the same period last year.
Meanwhile, costs and expenses rose a mere 7% YOY, thanks in part to a 1% reduction in headcount.
And the tax rate dropped from 16% in 2023's second quarter to 11% in this year's second quarter.
All of this translated into phenomenal 73% earnings per share ("EPS") growth. EPS of $5.16 obliterated estimates.
I'm not the only one blown away by this earnings report... Investors responded enthusiastically – driving the stock up more than 10% this morning.
This was such strong performance that it offset concerns about Meta's rising capital expenditures ("capex") – mainly to keep up in the AI arms race. You can see the jump in the slide below from the company's investor presentation:
Interestingly, this wasn't the case when Alphabet reported earnings last week (which I covered in my July 24 e-mail)...
Alphabet's revenue and EPS growth – at 14% and 31%, respectively – were strong. But they weren't as strong as Meta's and not enough to quiet concerns about rising capex, which is why the stock is down more than 5% since then.
For further insights, I texted an old friend this morning who has been an entrepreneur, executive, and investor in the tech sector for the past three decades. He invested in Meta when it was still a private company (at well under $1 per share – shares that he still owns!) and knows the company better than just about anyone. He replied:
It's not surprising that Meta delivered these results. It has been clear for some time, and [CEO Mark] Zuckerberg has clearly stated, that they are able to generate significantly positive returns on investment from implementing AI. We are now seeing the results of implementing these learnings at scale.
Go back to before and around when the stock collapsed to $89. The market thought Meta as wasting money on the "metaverse" and had a bloated cost structure. The latter was certainly true (and they fixed this), but the former (which represented a much greater share of spend) was a complete misconception. Zuckerberg had, even then, clearly stated that the majority of their investment was in AI (not the metaverse). A big miss by the market.
If you look through the market cycles of "love" and "hate" around Meta, you see a company that has consistently delivered against its plan. And I think they're still in the early innings.
But what about Meta's valuation?
At $507 per share this morning, that meant the stock would be trading at 25.0 times the consensus analysts' EPS estimate of $20.24 for this year (coming into the earnings report). But Meta blew past EPS estimates and guided third-quarter revenues to a range of $38.5 billion to $41.0 billion, above expectations, so analysts are scrambling to revise their models.
For example, the Bank of America analyst raised his estimate of this year's earnings to $24.43, meaning the stock would be trading at less than 21 times this number.
In summary, the stock of one of the greatest businesses of all time, which is firing on all cylinders, is currently trading at a price-to-earnings multiple below that of the average large American business (i.e., the S&P 500 Index). That makes no sense.
I continue to love Meta's stock.
2) I want to correct a mistake I made in Tuesday's e-mail... though as I'll also explain, I still think two-year U.S. Treasurys are a good place for your cash versus longer-dated Treasurys. As I wrote:
Just make sure, as I've written previously, that you're earning the maximum interest rate on your cash. That means avoiding long-term bonds, whose value will be impaired if the [Federal Reserve] cuts and interest rates fall. I would instead stick to shorter-duration Treasurys (or the equivalent), such as the two-year, which yields about 4.4%.
The middle sentence is exactly backwards. If you buy a long-dated bond – say, a 10-year Treasury, which is yielding nearly 4% today – and interest rates go down, the bond becomes more valuable, not less. Mea culpa.
That said, my recommendation to avoid long-term bonds and instead buy short-duration ones remains the same.
You might wonder why, given that the Fed is almost certain to cut rates at its next meeting in September – and will likely cut them at least twice more this year, for a total cut of 0.75%. If so, why wouldn't folks want to invest in long-term bonds to lock in the higher rates and profit when they appreciate in value?
Because I don't think long-term rates are likely to fall.
Allow me to explain...
A normal yield curve means that short-term rates are low and, as their duration increases, so does the interest rate. So, for example, a three-month Treasury might yield 3% annually... a two-year, 4%... and a 10-year, 5%.
But today, the yield curve is "inverted," meaning that shorter-durations bonds are yielding more than longer ones, as you can see in this chart from Public:
(An inverted yield curve has, historically, been a precursor to a recession. But so far, this hasn't proven to be the case – perhaps because of unusual economic and market dynamics in the aftermath of the pandemic.)
Compare the current yield curve to curves from about 10, 20, and 30 years ago (this chart from CrossingBridge also includes the curve as of the end of the last year, which is similar to today's):
Here's the key thing to understand...
The Fed aims to achieve a normal curve and restore the proper incentives with respect to speculation, investment, and lending. To do so, short-term rates will need to fall further and/or longer-term rates will need to rise.
I think the former is much more likely: As the Fed cuts, short-term rates will fall, but long-term rates will remain steady – making the two-year Treasury a good bet today.
3) Yesterday afternoon, my college buddy Bill Ackman announced on X that he's withdrawing the initial public offering ("IPO") of his planned closed-end fund:
I wrote about this in my July 16 e-mail, in which I mentioned a key risk – and the reason Bill cited for pulling the IPO: Concern that Pershing Square USA would trade at a discount, as nearly all closed-end funds do. I wrote:
But there's another question investors need to consider...
Where will the new fund's stock trade relative to its net asset value ("NAV")?
Keep in mind that Pershing Square USA is not a mutual fund. So if investors want out, they can't redeem – instead, they simply sell the shares.
But there's no guarantee that the shares will trade at the fund's NAV. In fact, Pershing Square's offshore closed-end fund, Pershing Square Holdings (PSHZF), has always traded at a discount to NAV that, at times, has exceeded 35% and is currently above 20%.
So why would anyone buy the new fund at the IPO – why not buy it at a discount to NAV after it starts trading?
In considering where Pershing Square USA could trade at, I noted that it was possible that the fund could even trade at a premium... but apparently, Bill was unable to sufficiently ease investors' concerns about the risk of it trading at a discount.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.