Talking Tech With Mark Mahaney: What’s Going on With Meta and Twitter?

Amanda Heckman: Hello, and welcome to this month's “Tech Talk” between Manward founder Andy Snyder and Wall Street tech veteran Mark Mahaney. Hi Andy. How are you today?

Andy Snyder: Good, good. Thanks for hosting us today.

Amanda: You bet. And Mark, thanks for joining us again. And kudos to you for your bullish call on Netflix when we spoke last month. The stock soared something like 30% in the two weeks after we recorded.

Mark Mahaney: Oh, okay. Well, thank you Amanda, thanks for remembering that. Good to see you, Andy.

Andy: Thank you.

Amanda: Now, for viewers, we've created this monthly video series to put the spotlight on the tech sector after an incredible boom over the past decade or so. Tech as a whole had a very rough 2022 and there's been some big news from Big Tech in recent weeks that we wanted to talk about today.

So Mark, I'll start with you. Both Twitter and Meta have laid off thousands of staff... and they're not the only ones cutting by far. Both Jack Dorsey, the former CEO of Twitter, and Mark Zuckerberg have blamed it on trying to grow too big too fast. Is this a sign of tech giving up? Is this the true bottom of the market? Where are these companies headed from here? What's your take?

Mark: Okay, well, let's see. I guess there's two points I'd make. One is Twitter is just an unusual case, and it's an acquisition of one company by another so I'm not surprised that there are layoffs. I think the much more interesting one is Meta/Facebook and what that means. I thought the letter that Zuckerberg wrote to his employees when he announced the 11,000 person layoff - that's a big number - I thought that letter was very educational and just intrinsically a very good letter where he fully took the blame, accepted the blame for mistakes at the company. And I think there were threefold or there was a major mistake and then he explained exactly what happened. So I think this company like some other of the internet digital companies over extrapolated from the COVID crisis, they had a surge in demand in 2020 and into 2021.

And like Amazon, they sort of over extrapolated and thought that there'd be kind of a permanent acceleration and demand for social media and for Facebook and Instagram. That turned out not to be the case, but the company overbuilt in response to that demand. Amazon said the same thing, but they said it earlier this year off the March quarter earnings, and Zuckerberg didn't say it until this week. So one company was less behind the curve than the other, but Zuckerberg also pointed out that they're seeing rising competition. That's another way of saying TikTok, and they had these Apple privacy changes that they had to deal with. So the company's had a lot of challenges, oh yes and then we're also heading into this recession.

So there was a series of these factors, and I look across the board, it's like this double whammy or it's... I'm not quite sure what the right way to explain it is... You had a surge in demand with COVID for a couple of these digital assets, so you overbuilt and now you're going in a recession where you typically would have to belt tighten. Well, if you overbuilt in the last two years, you're going to have to do excessive belt tightening now and that's exactly what's happening at Meta. I think we'll see it at some other companies. There's that with Meta and then there's TikTok and then there's the Apple privacy changes so I think that's going to be the most extreme example, but we should be looking for more of these types of hiring freezes and layoffs at tech companies. I don't think those two companies are going to be the exception to the rule. It's unfortunate reality, but I think that is the reality when demand trends soften, and we're pretty much through earning season. Demand trends have softened almost across the board.

Even companies or businesses that I thought would hold up really well like cloud computing, demand softened, and that was evident in the Microsoft Azure results and it was evident in the Amazon AWS results. The most resilient part of advertising is Google Search and demand softened there too. So I'm sorry, that's the lay of the land and I think it's going to get softer in the first half of '23 and hopefully it bases out somewhere in the middle. So anyway I'm cautious fundamentally, but at the margin of probably more optimistic stock wise, largely because of what I think is the turning in terms of inflation, but Andy and I can get into that.

Oh, anyway, hopefully that's not too long of an answer to your question.

Andy: Well, when you think about all these layoffs, 11,000 at Meta that's a big number, that's a big savings, I mean, it gets into the billions. Do you think it's ultimately good news for shareholders or do you think it's admitting defeat as Zuckerberg did, and there could be more trouble? Or do you think it's the bottoming out, let's tighten things up and let's get this ship headed in the right direction?

Mark: I think it's a good thing for shareholders. And I want to be careful, I don't mean that to sound too crass. Firing people, good for shareholders, it's not that simple. The key backdrop here is that for those reasons I mentioned earlier, we're going into a recession or we're clearly seeing softening in advertising trends. I mean, that's a clear trend. This company also faces greater competitive risk, they also had these Apple privacy changes, and they also built aggressively in 2020 and in 2021 so there's this unusual setup. So they have to tighten their belts. And so the fact that they didn't do that and announce this on their earnings call two weeks ago, that's what caused the market to straight off Facebook a mega cap name by 25%. I mean, Andy, you and I we don't normally see mega caps trade off 25% that just small caps, maybe mega caps no unless there's something really unusual.

And it's not like the revenue results or the number of users that Meta or Facebook had was unusual, those numbers actually came in line or even better than industry. It was the commentary that we're going to keep spending aggressively in '23 regardless of economic circumstances and Wall Street said, "No way. We're selling you." And then I called it the fastest two week pivot, the biggest two week pivot I've ever seen. Two weeks after getting shellacked the company says, "Okay, no mas, we're going to reduce our CapEx outlook and we're going to reduce our operating expense outlook and we're going to lay off 11,000 people." Fastest pivot I've ever seen, and I think that helps get the ship leaner and meaner when it needs to be.

And then in terms of stocks, look, I like Meta here. You'd mentioned Netflix as a good call and we can talk through plenty of my bad calls, thank you for not remembering those, but I think about Meta, it's always about the next call and what's going to next change? Well, now that they're getting their costs in line and expectations have been managed down correctly in terms of the revenue results, geez, with the stock trading at 12 times gap earnings, this is getting super interesting and I really like this asymmetric risk-reward setup on Meta.

Andy: Yeah. Well, right. So you mentioned TikTok a little bit and Twitter and this is much more speculative, but do you see any sort... So people are ditching Twitter, big companies are taking their advertising off, do you see a competitor creeping into that space? Is there anything on your radar that our viewers should keep an eye on?

Mark: Yeah, and Twitter, I'm not sure people are going to really... I've seen some people tweet that they're going to leave Twitter.

Andy: Ironic.

Mark: I love the irony of that and I hope that there's another Twitter that gets developed. I mean, I want to see more competition, somebody come out and offer a better service. Or if somebody really wants a highly curated, highly moderated content site, somebody should build that business. You can go for content moderation if you want it. I think there's a lot of good things about Twitter and of course there's some bad things about it and reflects a lot of things, but anyway Twitter's going to go through growing pains. I'm absolutely certain of that and I don't think it's going to grow for a bit. I hope Musk is successful in turning it around, I wish I'm all the success in the world. I don't think he's handled the process well at all, but it doesn't mean he and his team can't figure it out over time.

I think there's nothing wrong with running it as an advertising revenue model first and foremost. You can generate a lot of revenue if you do that well. I don't know that there's an alternative to Twitter. I hope there is one, but in the meantime I think it's going to probably be a year or two turnaround and then I hope we'll see Twitter again in the public market. So I don't know that there's a new Twitter is the answer to your question, and I think it's going to be a fascinating experiment. I guess I'm a little skeptical that Musk is really going to be able to create a super Twitter one that's dramatically better than what was in the past. I mean, he's one of the best, greatest entrepreneurs of our generation, but that doesn't mean he's going to succeed in everything.

He's had wild successes in two businesses and this is a very different sort of business, an ad supported town hall with a variety of different regulatory, political, social, but also business model risks and challenges that have to be worked out. I hope it works out. I'm a happy Twitter user and still find it a great place to track wide ranging topics that I'm interested in.

Andy: So what do you think Musk's endgame is? You mentioned it, I think he's going to try to turn it around and re-IPO it in a year, a few years, whatever. What do you think? Do you agree with that or you think his plans are?

Mark: No, Andy, I agree with you, but the timeline I'll disagree with you on. I think they would bring it out when problems have been solved, revenue growth is reaccelerating, cash flow is starting to be generated and I think this is a two to three year turnaround. It's not going to get done in a year. Famous last words, you can quote me on this a year from now and the IPO and I'll be shocked, but I think it's going to take a long time to turn around. Also, you're doing this in an advertising recession, well, that doesn't help. And the competitive landscape when it comes to advertiser dollars, I think we're probably overstating the number of advertisers that have left Twitter. That's my guess, but I know that some brands have left and brands have always been sensitive to the content that their brands are put up against.

You would be too if you were Procter & Gamble or Kimberly-Clark or Unilever or these really successful brand companies. And so I think if Twitter and Musk can address those brand concerns, advertisers will come back and spend more with Twitter. It's the same thing that YouTube has gone through historically, same thing that Facebook and Instagram have gone through historically and TikTok's going through. Twitter, just has to address the concerns of its customers and the customers are these large advertisers.

Andy: Sure. Yeah, I think that makes sense. And so you mentioned me getting to my thoughts on inflation. Before we wrap up, I'll just hit on that real quick. So I'm sure viewers are wondering about last week's numbers and the big rally we saw off it, and the only thing I'll say is I'm cautious of too much optimism. I think the Fed is watching and the Fed doesn't want a 6% rally in a day on the stock market just because inflation came in a little bit softer because that's very inflationary so I think we have to watch that. I think the Fed's going to pivot when the market doesn't expect it or when the most people are saying no way, this isn't going to happen. Things are too bad, too whatever. So I think it's too early to start pushing that. And we look at the inflation figures from the '70s, early '80s, we saw lots of ups and downs.

It's not going to be a big V shape. So that's my worry there is people think the inflation alarm, we get the all clear and then it comes right back because that's just the nature of it. People go out and start spending again. Well, there's good news and there is starting to be some light at the end of the tunnel, some interesting facts out there. We're certainly not seeing hyperinflation, which is good and so we'll see where that goes, but I don't think it's going to be a straight line in either direction. But I guess with that, Amanda, do you want to wrap it up and take us home?

Amanda: Yeah, we'll end things there. Thank you both so much for sharing your thoughts and insights and thank you all to our viewers who have tuned in. We'll be back with more next month. Take care.

Mark: See you, Amanda. See you, Andy.

Andy: Yep. Very good. Thank you.