Apple and Amazon hit by supply constraints, Facebook turns Meta

Amazon was the biggest negative surprise yesterday posting yet another negative free cash flow for the third straight quarter which is not something we have seen since 2000. Q3 EPS came in at $6.12 vs est. $8.96 driven by lower than estimated revenue and a $2bn increase in operating costs from wage increases and general inflation. Investors have sending Amazon shares down by 5% in pre-market driven by the very uncertain and disappointing Q4 revenue guidance of $130-140bn vs est. $142bn driven by supply constraints on top of warning that high holiday costs in Q4 could wipe out any profit.

Facebook’s jump into the metaverse is risky

Facebook is changing its name to Meta and is going all-in on the metaverse. It has been in the making for years by closed doors and recently Facebook gave more explicit hints of it, but yesterday Facebook revealed the largest overhaul and pivot of company of this size in many decades. The move into augmented reality and virtual reality is direct way to remove the negative focus from the Facebook brand, but also the physical limitations, or gateways if you will, to Facebook’s realm, which today are controlled by Apple and Google. Facebook wants to dominate the computing platform that gives access to its universe, which believe will be a metaverse delivered across different meta platforms.

There are several things about this rebranding and change of focus. It is clear why they are doing and probably long-term it is a necessity, but it increases the risks of Facebook and changes the short-term outlook. Mark Zuckerberg said that the metaverse will be tailored towards young people which Facebook is currently losing to Snapchat and TikTok , which is an indirect way of saying that growth will slow down on its current platforms. In addition the venture into the metaverse will cost a lot of investments with CAPEX going up by $10bn by next year taking CAPEX to over $30bn.

This will reduce free cash flow generation for some time and the efforts will require a venture into hardware with new VR/AR headsets coming out soon and a new watch next year to compete with Apple watch. These offerings will in addition reduce operating margins and increase the company’s complexity. On top of it, the move might be premature, as the world or young people will not find it interesting. That is the real risk. In our view many investors will begin to reduce their holdings in Facebook, or Meta as it is called, due to the drastic change in the business and the increased risks.