Sharp Tech with Ben Thompson - Google/Facebook/Snap Earnings and Another Dimension of Automation

Episode Date: October 27, 2022

Google's core business is sound but YouTube's numbers are murkier, the bull case for Meta as the market runs the other way, and a fair and balanced look at Snap. Then, a few mailbag questions about automation, Netflix abroad, and the psychology of a Red Bull fan.

Hello and welcome to Sharp Tech. I'm Andrew Sharp, and this is a free preview of today's episode. I've used these words a lot, but it's deterministic versus probabilistic. Deterministic means like we know for sure. X occurred and then Y happened, right? There's a direct causal relationship. Probabilistic is X probably happened and Y probably occurred. So we're going to assume that.

But by sort of by definition, that's not as accurate. And so the solution is to improve how accurate you're sort of the probably is, right? Like, does it go from maybe to possibly to probably to almost certainly? Like that's going to be the progression. And the way to do that is going to be leveraging machine learning. And so this is where I'm still in the long one relatively optimistic, relative to the competition for both meta and Google. because I think this is an area where having significant assets, both in terms of AI capabilities, but also just the sheer amount of data that these companies do still have and are still collecting,

they will be able to build better models for these sorts of things. And it's never going to be as good as it was, but it's going to get better over time. Well, it can't get much worse than the market reaction we're seeing this week. Google closed the day down 9% and hit its lowest point since March 2020. Wall Street seems to be appalled by meta's Q3 numbers, and their stock price is now back at 2016 levels after their earnings call on Wednesday. So two-part question here. First of all, did I enter the tech world right as the party stopped?

And is it only going to get worse from here? And then second, do you have a... any specific takes on meta's earnings and what we learned on Wednesday? With the caveat, I have only briefly gone through meta's earnings and I have not written about it yet. That's sort of like my, that's why I'm still right, despite all the podcasting. That's the forcing function to make through you really go through all the numbers and work through all these pieces.

But I kind of feel like the market's overreacting to meta a bit as well. And this is more of a historical take. So meta has this pattern of when something bad's going to happen. They tell you what's going to happen. And then they sort of overpredict how bad it's going to be. And so this happened when like their feed was going to get saturated. And they're like, look, we're running out of the inventory for ads. It's going to slow it on a growth rate, X, Y, Z.

Stock went way down. And then number one, they then beat expectations going forward. And number two, stories came along and it just exploded their inventory. So that was okay. When stories came, they're like, look, we have all this new inventory. So because we have so much more supply, the price is going to go down. And they don't, you know, to buy an ad in stories cost less than sort of is going to cost less because there's less demand compared to feed. So our average, you know, our prices are going to decrease.

Our margins are going to go down. And everyone panicked. The stock went way down. And then, number one, they were accurate. And then it sort of was picked back up. In this case, I almost think one of the most. most encouraging things from these results is that they beat their, they beat their predictions.

And that suggests to me that when they came out and they said, look, it's going to be this $10 billion hit this year, X, Y, Z is going to happen. I think actually the next quarter, they did say it's actually going to be a little bit worse. But it does give me the, both the historical, uh, behavior of Facebook in their predictions and earnings and the fact they sort of beat now gives me confidence they do have a handle on their business. Like they have a proven track record of knowing what's going on with their business, and they sort of hit their numbers again in the way they always do, which is a slight beat,

even when things seem very dire. And given that, when Facebook comes out and says, look, we got, or Beta comes out, we got a handle on this. Next score is going to be rough again, but we feel confident we're going to just sort of make this up through these AI earnings and all the sorts of things we're talking about. And that, you know, the, like, I believe them. And I think they've sort of earned the benefit of the doubt from an analyst perspective that things are going to be okay. Or they're going to be what Facebook says.

Like Facebook doesn't lie about their financial numbers. If anything, they lie on the downside sort of consistently. Like they sort of overstate how bad things are going to be. And so for that reason, it gives me, it sort of just, Facebook's a well-managed company. Say what you will about like the headsets and all and the things that they're doing from just a nuts and bolts, tackle and blocking perspective. it's a well-managed company that sort of has my trust from an analyst perspective. And so I didn't see anything particular surprising in these numbers. And then I go back to my assumptions, which is, well, in the long run, this is a relative game.

I think meta is advertising going to be relatively better. I think companies like Snap are really screwed. And all the advertising that went to Snap or went to LinkedIn or whatever is all going to sort of come back to Facebook because they're just going to be better at their one else. and they're probably going to be okay. So again, sort of against the market, but I think it's probably going to be sure. So you're not out there on Twitter shoveling dirt on meta like everyone else I saw online Wednesday night. Well, it's the same thing as Google. Number one, you have the broader expectations of bad results, which they were, although again, they beat, but they had the sort of soft predictions for the fourth quarter.

And then number two, everyone always wants to dump on meta. So it's just really primed for people to sort of go in on them. But again, with a caveat, I've not gone through the actual numbers. I just sort of like read a bit of the earnings call and looked at it. It seemed so I reserved the right to come back next week. It seems to me that things are fine. And they're also, they gave really encouraging numbers about like engagement and Reels numbers. Like the bit they focus on the call that Reels engaged.

is way up and also it's additive to engagement in the app because one of the concerns is if people are using Reels and they're not using the rest of the app, then you're actually cannibalizing yourself because those other parts of the app are monetizing better. And Reels, again, is a big inventory increase. They have way more canvas for ads in the future. Now, our Reels ads today, there's not that many of them. They're not that good. They will, there will be more and they will get better, just like what happened with stories. So I feel like the core meta, business, it seems like it's actually in a better place than a lot of people realize. It feels like, again, TikTok is still a big thing.

Oh, I was just going to say TikTok's about to get banned. So that's another reason to look at the upside. I mean, yeah, I mean, who knows? But even without that, I do feel like there's an overreaction. Now, there's the question about how much they're spending on the Metaverse stuff is a very fair and legitimate one. And if you're skeptical about the Metaverse ever becoming a thing, then you should be downgrading them because it's just sort of like a money suck. Right.

But as far as the core business, I'm not I'm not as worried as the market is. That was the other question I had. So Meta's Metaverse Division, Reality Labs, lost $3.7 billion in Q3. what does it look like if investors really do balk at this idea and the stock continues to just get walloped on Wall Street, how much pain can meta endure before they have to pivot? Well, theoretically, they can endure infinite pain because Mark Zuckerberg has total control. But like, like, so, I mean, they always talk about like governance should be like, poor governance should forced a discount on the stock, and perhaps, like, that didn't necessarily happen with

meta. Perhaps it's happening now. I mean, you can't share rolls have no say. Now, there are effects, like if Facebook employees realize they're not making very much money. And all these people are paid in stock. Yeah. I mean, I would be freaking out looking at the crash here, not that it's permanent, because I agree with you that at this point, there's more value in meta than the market is acknowledged.

But internally, the culture question is a big one as far as like how corrosive this could be if things continue to go sideways. Well, you have an issue, though, that I don't think anyone wants to leave their job right now. Actually, I think my suspicion is that's one of Google's, like Google said they were going to slow down hiring and then they hired more people last quarter than the previous quarter. Obviously, that's on a net basis. I'm betting that like Google's attrition rate plummeted. So people's like, you know, having a job at Google is pretty good. I'm not going to leave to go anywhere else. And so the reality is that is going to keep people in place to an extent.

Now, is that good for culture when people want to leave? But they're staying just because it's sort of a safe paycheck? No, probably not. I do think that, you know, that's going to be a challenge for meta. all these companies are sort of engineered for constant growth. Like they're sort of waste built into the system and having to actually cut back and trim. And there's been lots of reports about, you know, trying to engine, you know, manage people out of the company. And, you know, neither have gone directly to like, you know, direct layoffs, but it's definitely possible.

And that definitely has a big impact on culture. And it's, and it's, especially for companies that have, that are very sort of growth oriented. So that's going to be a challenge. but to go back to your original note, I mean, Zuckerberg's in total control for better or worse. All right, and that's the end of the free preview. If you'd like to subscribe and receive every episode of this show, you can do so by subscribing to Stratecre Plus.

That'll give you access to every Sharp Tech episode, all of our Sharp China episodes, The Dithering Podcast with Ben and John Gruber, daily analysis of the tech business from Ben, and more shows that we'll be adding in the, months to come. If you'd like to become a subscriber, click the link in your show notes to get access to the entire Stratectary universe.