Evercore ISI Senior Managing Director and Head of Internet Research Mark Mahaney joins Yahoo Finance Live to discuss Big Tech stocks following Meta and Spotify earnings.
JULIE HYMAN: We've been talking about it all morning. Meta shares are plunging this morning. They're down by 25%. That means the market value being erased from this company today is the biggest we've ever seen from any company because of the size of the company and because of the size of this drop.
So do you want to step in here, get these shares? Are you buying them on sale? Or should you stay away from them? Mark Mahaney is with us, Evercore ISI senior managing director and head of internet research. Mark, I know you cut your price target on the stock, but you still have the equivalent of a buy rating. What say you here? What are you thinking as you see that share decline in Meta today?
MARK MAHANEY: If you're willing to look out 12 months, I think this is a very good buying opportunity. If your time horizon is three to six months, I think you steer clear of Facebook/Meta. There's a series of risks headwinds that the company is facing now. Some of these-- I guess most of these have been rising for some time. You know, there was the Apple privacy changes which materially impacted the efficiency of Facebook's ad network. That's going to probably linger on. It's more than lingering, but it's going to be there for several more quarters.
And then the next risk is the rise of TikTok as a alternative usage and user magnet. That issue is going to be permanent. The question is whether some of these product changes like adding in Reels-- and then just the basic nature of Facebook, a lot of that social media element is actually a very different value proposition of what TikTok offers.
And then there are other challenges, including sort of the more temporary macro challenges. I think Facebook will work those to the back half-- through those by the back half of the year. But I think that as you step back and think about the stock, I don't think fundamentals are going to improve, i.e. revenue growth acceleration and margin expansion, until the back half of the year and into '23, which means the shares are probably dead money at this level for at least the next three months.
BRIAN SOZZI: Mark, TikTok is just growing by leaps and bounds. I was just surprised to hear how much Mark Zuckerberg talked about that competitor on the earnings call last night. How can they crack the code? How can they wrestle back market share from that company?
MARK MAHANEY: Well, I'm not sure they can. I think there's two things. One is just keep in mind that, you know, Facebook is Meta, is a family of apps, one of which I think is most directly competitive with TikTok. And that's Instagram. But the social media element of the idea of sharing stories, pictures, events with friends and family that's kind of the core Facebook offering, that's not what TikTok's value proposition is. There are also other apps within the Facebook family, within the Meta family, like WhatsApp. That's not part of the value proposition of TikTok.
So I think in part, they hedged themselves against the rise of TikTok because of the different proposition that they offer to users. And then the second thing is when they go head to head with TikTok is they're trying to bring in and better-- they are bringing in. They're trying to better integrate Reels and make that product content-wise, usage-wise, as good as the leader in the field, TikTok. Whether they can do that or not, I don't know. They're certainly investing a lot in that, and they absolutely should be doing that.
JULIE HYMAN: To go back to your earlier point about what things are going to look like 12 months from now, Mark-- so the TikTok thing seems to be an open question. But those other things that you mentioned, paint a picture for us of the Meta 12 months from now and what it looks like, what its growth looks like at that point, and will it have solved, for example, the Apple tracking issue and some of the other challenges, the non-TikTok challenges.
MARK MAHANEY: OK, that's the right setup. So I think one of the two or three biggest issues right now-- leave aside TikTok, then there's two kind of major issues. One is the working through some of the temporary inflation, supply chain challenges that Facebook/Meta's family of advertisers has to deal with. That's a temporary problem. I think that's three, six, nine months, something like that, till it gets solved. So that would be by the end of 2022.
The other one, of course, is the Apple privacy changes. And so the question is, how long will it take them to come up with what I call a son of IDFA or daughter of IDFA or a child of IDFA? IDFA, Identifiers For Advertisers. That was the system that was built around Apple and the data that they provided that helped advertisers track, measure, target, and attribute success or failures to different ad campaigns. And that was taken away, you know, for privacy reasons by Apple in the middle of last year.
And so it was a wonderful ad attribution, ad targeting, ad tracking tool-- no longer available. Facebook and others need to come up with a successor to that. I think they will. There's no particular proof out there that they will, but the stakes are so high and, frankly, the quality of the product development staff at Facebook is high enough.
And then there's so much incentive in here because you're trying to fix this for small businesses, for small marketers. So there's just so much incentive all around to get a solution here that I think one will come up. And it will come up within a 12-month period, hopefully before the end of this year.
BRIAN SOZZI: Mark, all these companies, all these social media giants-- Snap, I'm just looking at some notes here-- Snap, Twitter, Pinterest-- they're all being impacted by these Apple privacy changes. And of course, Meta last night warned about it as well-- $10 billion risk this year in terms of revenue. If you're an investor, what name do you gravitate towards? Do you go to some of the more hyper focused names like a Pinterest or Twitter on weakness, or do you still stay-- do you stick with Meta?
MARK MAHANEY: So of those three names that you mentioned, Pinterest, Snap and Twitter, I think the company that's most impacted and it's trading off the most, so it's the logical trade-off, is Snap. Snap and especially Facebook were the two that leaned in most heavily towards IDFA or the ad tracking, ad attribution models prior to the privacy change by Apple. That's not an issue for Twitter. Twitter really leans much more on brand advertising. And it's only a small issue, I think, for Pinterest.
The obvious 800-pound-- I guess it's the gorilla, whatever. It's the champion in the room, is Google, Alphabet, which had very little exposure to IDFA and is invested very aggressively in constantly improving both YouTube and its core search business. So Google will remain the highest quality tech name, probably along with Amazon, in the internet space.
And then-- but I do think that of those four names-- we talked about the ad names-- my guess is that the one with the most upside here, given valuation and given what I think of its ability to fix some of these challenges, is Facebook, remains Facebook, remains Meta.
JULIE HYMAN: I want to switch gears a little bit, Mark, and talk about Spotify as well because that's another name that's being hit today. I guess one of the through lines is the attempt by the CEO, Daniel Ek, to try to get investors to focus on the longer term. Do you think that that-- the same sort of framing that you were talking about for Facebook on short-term rockiness that translates into longer term value, do you think that goes for Spotify as well?
MARK MAHANEY: Yeah, I think so. I also think that with Spotify, this was a-- I sort of feel strongly that the markets got this wrong. Occasionally, the market makes mistakes, and occasionally, I make mistakes, too, so I may be wrong here. But with that 10% correction of Spotify shares last night, the results in the fourth quarter, I think, were in line or better than expected. People wanted a full year guide. They didn't get it. They only got it for the March quarter.
But the company did express its hope, its expectation that they'd be able to continue to add as many Prime subscribers-- I'm sorry, premium subscribers, paid subs, in '22 and MAUs, or Monthly Average Users, in 2022 as they did in 2021, i.e. there's no maturation here in the business, which is kind of the overhanging issue on Netflix. And then, really, it's a question of when gross margins inflect up. But I think that's a when issue, not an if.
And so you've got a name that trades on price to sales. When gross margins gap up, that means that the price to sales multiple will re-rate or go higher. So I love the unlock opportunity on Spotify. I think the stock is extremely dislocated. They're the leader in music streaming. And I think a lot of these podcasts investments have absolutely been the right call on their part. I think this is one of the best case cases of a company that's underearning.
Their gross margins in their ad business are so low. It's like 11%, 12%. You can't find another ad model with gross margins that low. And that's because of all the upfront investments they're making in content. They'll scale against that, so at some point-- I don't know if it's this year or early '23-- I think it's this year-- you're going to get this gross margin inflection point and you want to be long the stock before then. I like Spotify here now. I'm an aggressive buyer of this dip.
JULIE HYMAN: Mark, great to get some time with you. That's not even talking about Joe Rogan, which we could spend another five minutes on, but unfortunately, we're out of time for the moment. Mark Mahaney, Evercore ISI senior managing director, head of internet research, thank you so much. We're going to--