#SocialStocks: Information Commissioner’s Office issues Snap enforcement notice

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

MANIPULATED MEDIA: Meta Platforms is facing a review into its policies on manipulated content and AI-created “deepfakes” after refusing to remove an edited Facebook video on U.S. President Joe Biden, Cristina Criddle of The Financial Times reported. The company’s Oversight Board said it was opening a case to determine if the company’s current guidelines on altered videos and images could “withstand current and future challenges,” the board said.

SEC INVESTIGATES BREACH: The Securities and Exchange Commission or SEC, is probing a Twitter (TWTR) security breach that occurred in 2018, prior to Tesla (TSLA) CEO Elon Musk’s reign at the social media platform, Bloomberg’s Sabrina Willmer and Jef Feeley wrote. The SEC has been investigating the possibility that former top executives at the social media company, “failed to adequately disclose privacy issues to shareholders” or implement controls, noted the Bloomberg story.

EXPANDING REGULATORY SCOPE: EU regulators have sent out questionnaires asking customers and competitors whether Apple’s (AAPL) iMessage and Microsoft’s (MSFT) Bing should be regulated under the DMA, Reuters’ Foo Yun Chee reported. The DMA requires Microsoft, Apple, Alphabet’s (GOOGL) Google, Amazon (AMZN), Meta (META) and ByteDance to allow for third-party apps or app stores on their platforms and to make it easier for users to switch from default apps to rivals, among other obligations. People familiar with the matter say the EU asked in the questionnaires if there was anything specific to the services that business users rely on and how they fit into the companies’ ecosystems.

CALIFORNIA CRACKS DOWN: California Governor Gavin Newsom has signed into law AB 1394, a measure that would punish social media services for “knowingly facilitating, aiding, or abetting commercial sexual exploitation” of children, The Verge’s Adi Robertson wrote. The law is set to become effective on January 1, 2025, and adds new regulations and liabilities aimed at making social media firms crack down on child sexual abuse material, the author notes.

THE FUTURE OF HEADSETS: Apple is trying to make the next Vision Pro more comfortable to wear and Meta is aiming to release a cheaper Quest in 2024 and true AR glasses in 2025, Bloomberg’s Mark Gurman said.

ONLINE NEWS ACT: Alphabet’s Google is inching closer to blocking people in Canada from viewing news links on its search engine after the company rejected government regulations to assauge its concerns about an impending online content law, Bloomberg’s Randy Thanthong-Knight reported. The move is the latest blow to Prime Minister Justin Trudeau’s administration and its attempts to compel Google and Meta (META) to negotiate payments with local publishers under the Online News Act, which is set to become effective on December 19, the author notes. “We continue to have serious concerns that the core issues ultimately may not be solvable through regulation and that legislative changes may be necessary,” Google spokesperson Shay Purdy said by email.

PROBLEMATIC CHATBOT: The U.K. Information Commissioner’s Office has issued Snap (SNAP) and Snap Group Limited with a preliminary enforcement notice over potential failure to properly assess the privacy risks posed by Snap’s generative AI chatbot ‘My AI’. The preliminary notice sets out the steps which the Commissioner may require, subject to Snap’s representations on the preliminary notice. If a final enforcement notice were to be adopted, Snap may be required to stop processing data in connection with ‘My AI’. This means not offering the ‘My AI’ product to UK users pending Snap carrying out an adequate risk assessment. Snap launched the ‘My AI’ feature for UK Snapchat+ subscribers in February 2023, with a roll out to its wider Snapchat user base in the UK in April 2023. The chatbot feature, powered by OpenAI’s GPT technology, marked the first example of generative AI embedded into a major messaging platform in the UK. As at May 2023 Snapchat had 21M monthly active users in the UK. The ICO’s investigation provisionally found the risk assessment Snap conducted before it launched ‘My AI’ did not adequately assess the data protection risks posed by the generative AI technology, particularly to children. The assessment of data protection risk is particularly important in this context which involves the use of innovative technology and the processing of personal data of 13 to 17 year old children. The Commissioner’s findings in the notice are provisional. No conclusion should be drawn at this stage that there has, in fact, been any breach of data protection law or that an enforcement notice will ultimately be issued. The ICO will carefully consider any representations from Snap before taking a final decision.

ANALYST COMMENTARY: Stephens initiated coverage of Sprout Social (SPT) with an Overweight rating and $78 price target. Sprout Social’s social media management platform is the leading workflow solution with over 32,000 customers, the analyst told investors in a research note. The firm, which cites the recent prioritization of high-value mid-market and enterprise clients and the company’s “unique partnership” with CRM leader Salesforce (CRM), believes Sprout is capable of growing revenues at a greater than 25% compound annual growth rate over the next several years.

Wells Fargo lowered the firm’s price target on Meta Platforms to $372 from $389 and reiterated an Overweight rating on the shares ahead of quarterly results. The firm expects Q3 revenues near HE of guide and modest revenue acceleration into Q4. Wells also sees initial guide of $95B-$100B for FY24 OpEx, but expects below $95B for actual. The firm told investors to look for CapEx guide at $34B-$39B and forward color on duration/magnitude of CapEx cycle.

Wells Fargo also lowered the firm’s price target on Snap to $8 from $9 and maintained an Equal Weight rating on the shares. UCAN usage declined 5% in Q3, consistent with Q2, and Wells Fargo sees engagement improvement as the key gating factor to become more constructive on the stock, the analyst tells investors in a research note.

Loop Capital keeps a Buy rating and $375 price target on Meta as part of a broader research note, stating that the firm’s conversations with ad channel participants suggest a solid spending environment in Q3, with less upside momentum than in Q2 but with a more aggressive outlook for Q4. Trends at Meta appear to remain robust with continued Reels momentum, the analyst tells investors in a research note. The firm also states that Google search sounds solid while its YouTube performance is strong, though it keeps a Hold rating and $140 price target on Alphabet shares. Loop further states that “more brands, retailers and agencies appear to be recognizing the value” of Pinterest (PINS), backing a Buy rating and $37 price target on the stock.

RBC Capital analyst Rishi Jaluria reaffirmed an Outperform rating and $95 price target on Zoom Video (ZM) after attending the company’s Zoomtopia event. The presentation left the firm with a better understanding of the company’s AI Companion monetization strategy, the value proposition of Docs, and the strategy for contact center, the analyst tells investors in a research note. The firm added that Zoom Video management also reiterated that M&A remains on the table and that the buying environment has not changed.

Piper Sandler says the firm has more conviction in Pinterest’s (PINS) ad product improvements following September ad checks that showed outbound clicks in September grew over twice month-over-month while cost per click was down about 60% month-over-month. The firm, which thinks improvements are tied to the new Direct Links format discussed at the company’s analyst day, keeps an Overweight rating and $35 price target on Pinterest shares.