Meta Meltdown Drags Wall Street Lower at Open; Dow Down 220 Pts

7 months, 3 weeks ago - February 03, 2022
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Meta's huge share price drop shakes world tech stocks

Meta Meltdown Drags Wall Street Lower at Open; Dow Down 220 Pts

U.S. stock markets fell sharply at the opening on Thursday, pulled down by a slump in Meta Platforms stock after its disappointing earnings update on Wednesday.

The Facebook owner opened down 26%, reversing all its gains of the last 20 months, after the company reported its first-ever quarterly decline in active users and forecast a squeeze on profits this year from heavy investment plans and from Apple's privacy policy changes that came into effect last year. Absent a recovery, that will be the biggest one-day loss in market capitalization for any company ever.

By 9:40 AM ET (1440 GMT), the Nasdaq Composite was down 1.9%, while the S&P 500 was down 1.2%. The Dow Jones Industrial Average, less exposed to longer-duration growth stocks such as Meta, fell only 218 points, or 0.6%, to 35,412.

The main indices had enjoyed a four-day winning streak prior to Thursday.

Meta's report revived familiar fears about the stretched valuations of many technology stocks, illustrating that the kind of collapse that has become commonplace in 'profitless tech' is also possible even in stocks that have consistently thrown out cash in recent years. Meta's slump comes only a week after streaming giant Netflix issued a similar shock warning, and only a day after PayPal fell by over 20% in response to a profit warning of its own. PayPal stock shed another 3.8% in early trading on Thursday.

Almost inevitably, Meta's results had their most direct impact on Snap stock. The Snapchat parent has faced similar issues of slowing growth and is still unprofitable. Its stock had fallen over 20% in response to its previous quarter's results, and it fell another 20% on Thursday. Spotify (stock also fell 18% to a 21-month low after warning of a coming slowdown in user growth.

Snap reports after the close, along with Amazon. Amazon stock, which peaked in November, fell another 6.2% as investors adjusted for the risk of a similar disappointment. Analysts have fretted that rising labor costs and the reopening of the retail sector may pressure the fourth quarter's earnings for the e-commerce giant. However, like Microsoft, it has a highly profitable Cloud-hosting division to prop up earnings.

On a more positive note, data released earlier suggested that the labor market was on track to put behind it the soft patch caused by the wave of Omicron-variant Covid-19 in January. Initial jobless claims fell by more than expected to 238,000, their lowest in three weeks, while unit labor costs rose by much less than expected in the fourth quarter, alleviating fears of entrenched inflation. ULCs across the economy rose only 0.3% from the third quarter, rather than the 1.2% rise expected. There was also a slight drop in the prices paid component of the Institute for Supply Management's non-manufacturing index, suggesting that inflationary pressures may be close to peaking.

Also defying the gloom was T-Mobile stock, after the cellular carrier reported a buoyant fourth quarter and upgraded its estimate for savings from its merger with Sprint. T-Mobile rose as much as 10% before retracting to be up 8.8%.

Meta's huge share price drop shakes world tech stocks

Shares in Facebook owner Meta fell 20% in U.S. premarket trade on Thursday after the social media giant issued a dismal forecast, blaming Apple's privacy changes and increased competition.

The huge drop, which comes before Amazon earnings later in the day, spilled over to Europe, where technology stocks posted some of the steepest declines and soured the mood across global financial markets in another busy day of central bank meetings.

Meta was set to lose a fifth of its market value, erasing about $200 billion. If the premarket losses hold, a decline of this size in Thursday's session would mark the company's worst one-day loss since its Wall Street debut in 2012.

"Meta CEO Mark Zuckerberg may be keen to coax the world into an alternate reality, but disappointing fourth-quarter results were quick to burst his metaverse bubble," said Laura Hoy, an equity analyst at Hargreaves Lansdown.

Big U.S. tech companies have come under mounting pressure in 2022 as investors expect policy tightening at the U.S. Federal Reserve to erode the industry's rich valuations following years of ultra-low interest rates. The tech-dominated Nasdaq fell more than 8% in January, its worst monthly drop since the end of 2019.

"The downgrade in the earnings outlook by Meta and other companies took markets by surprise," said Kenneth Broux, a strategist at Societe Generale in London.

"The tech selloff spilled over to broader equity markets this morning and with the Fed preparing to raise interest rates, we could see more volatility going forward," he said.

European technology heavyweights ASML, Infineonand SAP were among the shares weighing the most on the region's STOXX 600 equity benchmark, in what traders viewed as a kneejerk reaction to the Facebook tumble. Infineon was also penalized by a conservative outlook.

Meta reported a decline in daily active users from the previous quarter for the first time as competition with rivals like TikTok, the video sharing platform owned by China's ByteDance, heats up.

Meta said about 3% of worldwide monthly active users in the fourth quarter consisted solely of violating accounts while duplicate accounts may have represented about 11% of usage.

The disappointment over Meta's earnings and the subsequent stock fall raised memories of the bursting tech bubble in 2000.

Investors seem to be becoming highly selective after the sector's record-breaking run in recent months.

According to research firm Vanda, purchases from retail investors in late 2020 and early 2021 were focused on expensive tech, EVs and so-called "meme" stocks. In the past week purchases of large-cap tech have skyrocketed while speculative assets have seen very little demand.

The so-called FAANG group of Facebook, Amazon, Apple, Netflix and Google's Alphabet has seen around $400 billion in market capitalization wiped off in the opening weeks of 2022 as cheaper segments of the markets become more attractive while central banks taper stimulus.

Other social media stocks were also hit hard in pre-market trading on Thursday, including Twitter, Pinterest and Spotify. Spotify has been beset by a row over COVID vaccination misinformation and also released disappointing results.

Stocks futures for the Nasdaq fell as much as 2.4% on Thursday.

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