Meta & Qualcomm – Macro not micro

Meta Platforms Q2 2022 – Slows the Metaverse.

• Meta Platforms reported soft numbers and increased the price for the Oculus VR headset in a sign that the next year or so is going to be tricky and that investments are being slowed to deal with that.
• Revenues / EPS were $28.8bn / $2.46 broadly in line with consensus at $28.9bn / $2.35.
• The real problem was guidance where revenue for Q2 2022 is expected to be $26.0bn – $28.5bn which is pretty far short of the $30.3bn expected by the market.
• Meta continues to struggle with Apple’s advertising policies, TikTok and the massive losses being incurred by Reality Labs all of which were supposed to be cushioned by strong advertising sales and profits.
• However, this is no longer the case, so hiring has been slowed and Reality Labs has increased the price of the Oculus Quest 2 by $100 or 33%.
• A large part of the $2.81bn that Reality Labs lost in Q2 2022 is due to the low price of the Oculus Quest 2 as Meta Platforms seeds the market for the Metaverse by subsidising the hardware.
• The net result of this price hike is that sales of the device and its successors are going to slow down raising the possibility that Metaverse will take even longer to take off than RFM has predicted.
• However, with a very high market share across both VR categories, Meta is already by far the market leader and taking its foot off the gas in this climate may not hurt its market leadership very much.
• Consequently, I think the outlook for Meta remains tricky but relative to its peers the shares are not particularly expensive.
• However, I don’t find them particularly compelling either as advertising has short to medium-term headwinds and the Metaverse remains years away.
• I continue to seek a better entry point.

Qualcomm FQ3 2022 – Macro not micro.

• Qualcomm reported good FQ3 2022 earnings but guided weakly prompting a small decline in the share price after hours underlining the company’s defensive nature thanks to its relatively low multiple.
• FQ3 2022 revenues / adj-EPS were $10.9bn / $2.96 ahead of consensus of $10.8bn / $2.90.
• However, the company guided weakly for the coming quarter with FQ4 2022 revenue / adj-EPS of $11.0bn – $11.8bn / $3.00 – $3.30 compared to consensus of $12.0bn / $3.25.
• The problem is simple in that inflation and the weak macro environment are reducing the frequency with which lower-end Android devices are being replaced.
• This makes the end market smaller meaning fewer chips shipped and lower royalties paid to Qualcomm.
• Qualcomm is a leading indicator for the handset market as it typically ships chips to meet demand for the following calendar quarter.
• This means that weakness in chip shipments for Qualcomm in calendar Q3 points to a weak Q4 for the handset industry.
• The fact that the weakness is coming in lower-end devices is not a big surprise as it is the lower end of the income range that is most impacted in an inflationary environment and therefore the most likely to delay replacing their smartphone.
• There is nothing that Qualcomm can realistically do about this beyond the measures that it has already taken such as broadening its appeal to other segments such as automotive, the Metaverse and so on.
• The company also reported an extension of its patent agreement with Samsung which reduces risks and called out steady progress on its Windows on Arm developments.
• In a nutshell, this is Qualcomm’s effort to catch up with Apple’s superlative M-series of processors and most of the research that I have done indicates that it will get there eventually.
• This may be taking a little longer than expected as at its analyst day in 2021, the company hinted that the next generation Snapdragon would sample during the summer of 2022 but I have not seen any sign of that yet.
• This is not a big problem in my opinion as there is a great opportunity to migrate PCs from the x86 processor to Arm and with Apple’s products staying in-house, the market opportunity for Windows is wide open.
• Hence, it is best to get it right rather than rush out a half-baked product that does not fulfil its promise.
• The net result is that Qualcomm will suffer from macro weakness which I think will continue to pressure the share price less than many of its much more highly valued competitors/peers.
• I continue to think that Qualcomm remains one of the best places to sit out the macro downturn in the semiconductor sector as its valuation is defensive and the long-term outlook outside of handsets remains good.