Oil and Geopolitical Risk
Crude oil prices moved higher over the last 24 hours on Middle East tension. The market pulled back as traders braced for possible escalation over the coming days or weeks. Price action yesterday looked good early, then fell after news headlines hit.
Three signals pointed to escalation. The United States is set to evacuate non-essential staff from embassies in the Middle East. Israel put jets in the air yesterday, reaching the Iranian border before turning around. This morning Saudi Aramco issued a work-from-home order for its headquarters staff - the first time that has ever happened. These events drove a risk-off tone that mattered more than the earnings results.
Meta (META)
The move looks like buy the rumor, sell the news. META reported revenue of $64.6 billion, above the $63.37 billion expected. Adjusted earnings per share came in at $3.83, a miss against the $5.46 expected. The miss came from a $9.89 billion charge in the quarter, which could rise to $18.6 billion once settled. Excluding the charge, EPS would have been about $7.40, well above expectations.
Free cash flow was negative $2.12 billion because capex exceeded the operating cash flow from the day-to-day business.
Guidance beat the street in parts. Q4 revenue midpoint is $75 billion versus $73.7 billion expected. Capex guidance was raised: the low end of the range is now $135 billion to $145 billion, lifting the low end by $5 billion.
Meta AI drew attention. It will be built into Meta glasses, and over 10 million US and Canadian users set up agents in the last 6 weeks.
The main headline, and the reason for the initial move up, is a plan to issue class C shares for every class A or B share, effective January 2027. This works as a two-for-one stock split, keeps Mark Zuckerberg's voting control, and does not dilute the A shares. It is a way to raise capital to fund AI spending, different from other companies issuing debt to pay for AI capex.
On the call, Zuckerberg said Meta AI could eventually earn more revenue per user than the family of apps, which already earns several hundred dollars per user per year. Right now 97% of revenue is ads and traditional revenue, so the firm is widening its mix. The Meta AI app will launch soon, with smaller, more portable models coming. The company gave more detail on its outlook than in the past - weak outlook detail has been a headwind on prior calls.
Tes(TSLA)
Shares moved lower despite a beat. Revenue was $28.04 billion versus $27.8 billion expected. Adjusted EPS was 48 cents versus 43 cents expected. Free cash flow was a large beat at $1.53 billion; the street expected negative $4.92 billion. Automotive gross margin was revised up, a clear positive.
Shares fell most likely on capex guidance, which was revised down. The street worries that TSLA is slowing its own data center and AI spending, which could hurt the company long term. Other companies have been hit for raising capex; TSLA is doing the reverse and staying within the bounds it set over recent quarters, and the street did not appreciate that this morning. Both top and bottom line beat, with improving profitability fundamentals.
Lam Research (LRCX)
Good was not good enough. Shares fell sharply, driven by the commentary rather than the numbers. Revenue was $8.22 billion, up 54.4% year over year, showing demand. Adjusted EPS was $2.20 versus $2.18 expected. AI is driving higher semiconductor demand and device complexity, and LRCX is seeing those tailwinds.
The sticking point: supply chain constraints are limiting growth, which the company flagged in the release and in executive commentary. The street worries LRCX will struggle to build out components needed for the tools used in fabrication plants, which could delay orders in the back half of next year. The concern centers on order backlog and staying on time, caused by a shortage across the chip industry.
S&P 500 Levels
Upside resistance sits at 7735 based on this morning's call flow; downside support at 7640 - a wide 95-point range. The VIX is near 18, implying a move of more than 1.2% up or down for the S&P 500. Today looks driven by geopolitical risk and news headlines rather than the earnings, which were mostly solid over the last 24 hours.
