Shares of cloud networking star Arista Networks (ANET +0.84%), artificial intelligence (AI) leader Nvidia (NVDA +2.59%), and programmatic ad platform The Trade Desk (TTD 2.57%) plunged 7.9%, 2.6%, and 7.6%, respectively, today as of 3:12 p.m. EDT.
Arista, a cloud networking pioneer, is a large supplier to Meta Platforms (META +0.22%), the parent company of Facebook, Instagram, WhatsApp, and Quest VR offerings. Therefore, as Meta's spending goes, so goes the revenue trajectory of Arista.
Although not as highly concentrated, Nvidia is also a big supplier, as Meta continues to deploy heavy quantities of Nvidia chips to improve its Reels recommendation engine and advertising tools. Meanwhile, The Trade Desk is somewhat of a peer, as both it and Meta are large digital advertising players.
Last night, Meta reported strong earnings but gave a rather conservative outlook for growth and spending, sending both its own stock and those of its peers and key suppliers down for the count Thursday.
NYSE: ANET
Key Data Points
Spending will grow but not as much as anticipated
Last night, Meta actually delivered very strong earnings results, with revenue up 23.2% and earnings per share of $4.39, up a whopping 168% -- although that was off a very low base of last year's numbers. But both numbers handily beat analyst estimates.
Meta was initially up on the release but then turned down after CFO Susan Li commented on the current quarter's trajectory. When asked about trends into Q4, she noted:
Coming into Q4, we've been seeing continued strong advertiser demand in key segments, including online commerce and gaming. But having said that, we are also seeing more volatility at the start of the quarter. That's in part why we widened our guidance range to capture that uncertainty. And so for instance, while we don't have material direct revenue exposure to Israel and the Middle East, we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook. It's hard for us to attribute demand softness directly to any specific geopolitical event. Historically, we have seen broader demand softness follow other regional conflicts in the past, such as in the Ukraine war. So, this is something that we're continuing to monitor.
That comment seemed to have spooked investors, who seem to be taking a negative view of earnings and commentary this earnings season. Meta did guide for $36.5 billion to $40 billion in revenue in the fourth quarter, which is a step up from the third quarter's revenue of $34.1 billion.
However, the fourth quarter usually sees an increase due to it being the holiday period. Therefore, the forward outlook might not have been as robust as thought. The midpoint of that range would signal 18.9% growth -- still good but a deceleration from last quarter.
The cautious statements regarding advertising spending in the fourth quarter are likely affecting The Trade Desk, which is the leading buy-side software platform for programmatic digital advertising.
In addition, Meta gave a preliminary outlook for its capital spending plans, both to close out 2023 and for all of 2024. The company now sees capital spending between $27 billion and $29 billion, down from a prior range of $27 billion to $30 billion. Further, the company predicts 2024 capital spending will be between $30 billion and $35 billion.
Those 2024 spending figures may have been a bit lighter than some had thought, with analysts penciling in $33.8 billion for next year, above the midpoint of that range. That could be why both Arista and Nvidia are falling today.
Meta is a huge customer for Arista, which generated 26% of revenues from the social media giant last year. And, of course, all large tech companies are investing heavily in AI and, therefore, Nvidia H100 and A100 chips. While Meta's management noted that AI spending would be the top priority within that capital budget, the relatively muted overall figures may be negatively affecting Nvidia today as well.
Focus on the long term
It's probably unsurprising that tech stocks that have benefited handsomely from the enthusiasm over AI this year are now coming back to earth a little bit as investors look for immediate financial benefits. However, investors should remember that the AI revolution will likely be a decade-long marathon, not an immediate sprint. Therefore, as these AI beneficiaries sell off, long-term investors may want to think about buying or adding to existing stakes.
