Big Tech ‘missed earnings by 20 miles,’ analyst says

Jefferies Senior Analyst Brent Thill assesses the state of tech sector, looking at industry leaders like Meta, Google, and Microsoft amid corporate earnings season.

Video Transcript

SEANA SMITH: Let's take a look at Meta. You can see-- wow, look at that-- the stock now off just over 9%. The earnings miss, also weak guidance here weighing on shares in after-hours trading just above 117. Let's bring in Brent Thill, Jefferies senior analyst, here with more on this. And Brent, I know you've only had a few minutes here to dig into these numbers. But what's your first take?

BRENT THILL: Look, across the board, tech continues to miss. And they're disappointing-- I think what's most disappointing are the expenses. I think everyone wants Zuckerberg to hit the air brakes on expenditures. The fact that they're holding headcount flat is good, but I think everyone is calling for more severe measures in terms of trimming headcount, trimming expenses to get a hold of what's happening in this macro storm.

So I think, as we've said across tech, there's nothing really different here. It's the same story. Microsoft miss, Google miss, Facebook miss, Texas Instrument miss-- everyone's missing. The macro is taking hold. And what you need to do in those times is, you can't control the top line, but you can control the bottom line. And I think a lot of tech, including Meta, has done a terrible job of getting a hold of the expenditures. It's hard to shift quick.

But I think everyone wanted to hear more severe measures on the expense cut. And we didn't get that. And so perhaps we get more on the call. But until we get that, this is the same issue at Microsoft and at Alphabet. And investors wanted a harder line in the sand on expenditures, and we're not hearing that yet. I think we'll get that. But I think ultimately, it's going to have to get a lot worse before these companies actually get in front of it.

And unfortunately, right now, there's really no support for any of these tech names, as we've been saying tactically, until we find the bottom in the fundamentals. And we are not near the bottom in the fundamentals. As we've said, it's a dark winter coming. We think there's tactical pain ahead for tech. And just, again, it's just another reason to steer clear of tech right now for a lot of investors until this clears out.

DAVE BRIGGS: And as you talk, we see that number continue to fall. Brent, now 11 and 1/2% down after hours. And Brad Gerstner, of course, brought up what you're discussing. His company controls 2 million shares of Facebook, wanting a headcount reduction of 20%. Do you think-- would you like to hear that address? Do you expect to hear anything about that address in the call?

BRENT THILL: Well, they had already addressed it. They said flat headcount through '23. So we didn't get what Brad wants. It's clearly the right thing to do, right? There's an incredible amount of bloat. And we are effectively going into a recession. We've been talking about this repeatedly that it is going to get harder as we go into '23. The fact that companies like Microsoft and Google are all seeing it, it's just an indication of what's to come. And it's going to get worse.

And so holding flat, I think is not good enough. And I think that's why you're seeing the reaction that they don't get it. They're not listening to what investors want. And investors already have enough-- had so much pain that they don't want to stick around for this. So, it's-- again, we've seen a clean sweep. There's nothing different here between Snap, Microsoft, Google, and Meta.

And again, you've seen it across semis. You've seen it across most of the rest of software. And if you haven't seen it in software, you're going to see it. They're only delaying the inevitable, in my opinion. So it's just-- it's really difficult to find anything to get excited about, other than valuation.

But Facebook's been cheap for a long time. And it doesn't-- the stocks are not finding bottoms until we find a fundamental bottom and I think that's what's been really hard for investors. It's been hard for me, to be honest. As an analyst, it's like, what's baked in? And what's baked in is nothing until the fundamentals bottom. And we are still probably a quarter or two away from fundamentals bottoming.

SEANA SMITH: Yeah, Brent, it's very different than this tone, obviously, that Mark Zuckerberg is striking in this earnings release. He was saying that while we do face some near-term challenges on revenue, the fundamentals are still there for a return to stronger revenue growth. It sounds like you strongly disagree with that sentiment. If there could be one thing that Meta needs to focus on, I know you were saying they need to pull back on spending, but the one thing that they can do in the short-term to better position the company for maybe the second half of 2023, what can they be doing today?

BRENT THILL: Look, I'm not disagreeing that there's going to be a recovery. But I think everyone-- we've said this in tech. Tech is awful at getting in front of the puck. If you guys are hockey players, you know what I'm talking about. Like, this is-- they just don't understand how they can get in front of it. Everyone is late to this. No one is prepping. No one's knowing is acting on offense into a macro storm. You don't, like, wait it out, and then all of a sudden, you get wet and then you're like, I'm going to buy an umbrella. You buy an umbrella first, right?

So, like, of course, it's going to get better. But like, if you listen to Jefferies economists, which Dave Zervos and Aneta Markowska have been dead on, like, things are going to get worse. And the overall macro continues to soften. So, again, I don't think this hope of things getting better, it's not getting better. They missed earnings by 20 miles.

So, you know, I understand what tech companies are trying to evangelize for their platforms, but let's just talk about the reality of the environment. When you have an absolute 100% clean sweep of downward pressure across all the top stories with the exception of, like-- OK, let's say 98%. There's 2% that are doing OK still. Like, you got to get more defensive. And they're not-- these companies aren't acting quick enough.

DAVE BRIGGS: Getting back to the hockey puck, though, Brent, don't you think Mark Zuckerberg sees himself as Wayne Gretzky skating to where the puck is going in the metaverse, although Gerstner wants $5 billion in cuts on spending there. Would dramatic metaverse spending cuts change at all your perception of a company that's trading at, what, 10 and 1/2 times earnings?

BRENT THILL: Well, and there's no question he skated, but he's, like, seven rinks in front of the puck on the metaverse. We're not ready for it, OK? You know, when you talk to young audience, they're like, I don't want to wear a headset for more than 10 minutes. They don't want to wear it for two hours. This is way out there to people. It's way out. And I think ultimately, this goes back to the-- let's go back to Microsoft. Microsoft, the same thing. You've got to go back to the core. The core market that they're in is incredible with their user base globally, the billions of users, and what they can do in the advertising market.

Go back to the core. Stop spending on things that don't matter right now. You can come back to it, but you don't have to do it right now. And I think this is Altimeter's point. And I deeply agree with this view. Go back to the core, huddle, stay underneath the bust stop while it's hailing out, and when the sun comes back out, you can go plant the metaverse flowers. You can go do all these other things. But don't do it right now when it's pouring rain.

SEANA SMITH: Brent, while we have you, we've got--

BRENT THILL: I don't make up-- look, I don't make up the rules. All I'm saying is, this is what our clients are saying. And I agree. And he is not following the advice.

SEANA SMITH: Yeah, and Brent, I do agree with a lot of what you're saying here just in terms of being way too early. People simply aren't on board. They aren't buying these headsets. And we're certainly seeing that reflected in these numbers that we're getting today. Brent, while we do have you, though, let's talk about Amazon. That's going to be the big focus after the bell tomorrow. We have discussed Amazon with you at great length in the past. I know a lot of what analysts and what investors are going to be watching is any guidance here in the current holiday quarter. But what are you expecting to hear?

BRENT THILL: Well, if it's any indication of what we've seen already this week, it's more bad news. Sorry to be so negative. But it's not good right now. And I think, look, Amazon has the advantage of already have gone through part of the downturn, right? For the bulk of e-commerce, e-commerce saw it first, right? We're seeing software in these other categories see it later. So the good news is, they've gone through part of this.

Obviously, the consumer, I think, is going to continue to soften despite what Visa and other CEOs are saying. I think the consumer is going to continue to soften a little more. And so the e-com business is still a concern. I think in AWS, given the weakness at Azure and the potential-- not huge upside for Google Cloud, everyone is super fearful that they are the 800-pound gorilla in cloud at 60% market share of the big three. So if they show weakness in the AWS, no one really cares about the e-com business. You've got to have the software business, which creates the bulk of the profits, continue to do well.

Now, they've been putting up 60% backlog growth the last three quarters. The growth isn't going to fall out of the sky. But ultimately, it only took one point of the Azure D sell for Wall Street to freak out and send Microsoft stock down almost 8% today. So I think what the market's telling you is that any bad news is still not in these stocks. And so we like Amazon long-term. I think it's an incredible franchise. I think they're absolutely dominating cloud computing. It's not-- you can't catch up to these guys. No one can catch them. They're gone.

And so the good news is, they're in an incredible position. The bad news is, I think what we're seeing is any fundamental issue still, investors are just ruthless, and they're just selling these stocks down even more, given these negative data points. So I think the good news is by the time we get to the print tomorrow, the stock obviously will have already been under tremendous pressure. And I'm assuming Meta's not going to help tech again tomorrow as well, given what happened with Microsoft and Google last night and the selloff in tech today.

DAVE BRIGGS: Looks like the case. And finally, that gets us to our survey today. I think you just answered it, though. We're getting one FAANG stock. We're taking Netflix out, putting Microsoft in. You get three to five years. You're playing one stock. Who is it?

BRENT THILL: One FAANG? For me, it's still Amazon.

DAVE BRIGGS: OK, we got an Amazon, we've got an Apple, and we've got a Microsoft. So no leader yet. Brent Thill, always good to see you, sir. Thank you.

BRENT THILL: Thank you.