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Motley Fool Issues Rare “All In” Buy Alert
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FAANG stocks, which includes Meta Platforms (META -2.10%), previously called Facebook, Amazon (AMZN 0.70%), Apple, Netflix, and Alphabet, previously called Google, have all seen dramatic share price declines after their respective third-quarter earnings results.
Long considered the darlings of the stock market, these tech giants have more recently been pressured by a combination of adverse factors. This includes an economic slowdown, rising inflation, supply chain challenges, intense competition, and increasing investor preference for value over growth stocks.
However, all is not lost yet. While a positive reset in tech valuations is awaited, Meta Platforms and Amazon are still fundamentally strong companies. Here’s why they can prove to be attractive picks in the current market environment.
Lately, Meta Platforms has been getting a lot of bad press — be it for its disappointing third-quarter earnings performance, weak fourth-quarter guidance, massive spending on its Metaverse concept, or rising competition with TikTok.
However, Meta still has loads of growth potential. The social media giant reported a 4% year-over-year decline in third-quarter revenue. But, excluding currency impact, the company reported a 2% year-over-year rise in revenue. The company also managed to report a 4% year-over-year jump to 3.71 billion users (who used the company’s products at least once a day) in the third quarter. While not very impressive metrics, they nevertheless show that the company is growing even during the current advertising slowdown.
Meta has been experimenting with different content and advertising formats to reach out to a larger user base and improve targeted advertising. To that effect, the company is already finding some success with its Reels product — a short video format that has already been played 140 billion times a day across Facebook and Instagram and is poised to grab market share from TikTok. Meta has also introduced click-to-messaging ads (businesses directly contacting customers) to monetize the huge user base on WhatsApp and Messenger.
Wall Street is viewing Meta Platforms’ recent employee layoff (almost 13% of the workforce) as a positive move that will help rein in expenses and improve overall profitability. The company is exiting noncore hardware projects such as the Portal smart display business and smartwatch business to further reduce expenses. Meta also has a strong balance sheet, as evidenced by its cash balance of $41.8 billion, exceeding the total debt of $26.5 billion.
Meta is currently trading at 10.8 times earnings, which is close to its historically low levels. Hence, while investors may experience some stock price volatility for Meta in the short run owing to several unresolved challenges, the stock stands a good chance of significant recovery in the coming months.
Shares of the e-commerce and cloud computing giant Amazon are currently down by over 43% so far this year. While some company-specific challenges such as rising operating expenses and supply chain disruptions have undoubtedly affected investor sentiment, Amazon has mainly suffered due to macroeconomic headwinds. However, the company’s fundamentals are still very strong.
Launched in 2002, Amazon’s cloud business (Amazon Web Services, or AWS) continues to be a cash cow for the company. Although AWS’ third quarter revenue was up by 27% year over year to $20.5 billion, lower than the consensus estimate, the segment still accounts for almost all of the company’s profits. AWS is a leader in the global cloud infrastructure services market and accounted for a share of 34% at the end of the third quarter. AWS is well-positioned to further benefit from rapid growth in the global cloud computing market, estimated to expand from $484 billion in 2022 to $1.5 trillion in 2030.
The retail business accounts for the biggest portion of Amazon’s revenue, and it has been a drag on margins for the past several quarters. To resolve this problem, the company is focusing on expanding its third-party marketplace — a move that is helping it reduce expenses (its first-party marketplace incurs expenses for inventories and order management) and rapidly expanding its product catalog at a minimal cost.
The retail business is also driving the growth of the company’s digital advertising offering (Marketplace Ads). Thanks to insights obtained from first-party data, the company manages to show the most relevant advertisements to shoppers. Advertisers benefit from the high purchase intent of the shoppers on Amazon’s website, which in turn is further fueling the company’s advertising business.
U.S. retail sales rose 1.3% year over year in October 2022, the highest rise in the past eight months. This can be a positive sign for Amazon, especially during the holiday season. Hence, Amazon presents an attractive opportunity for long-term investors based on strength of its e-commerce, advertising, and cloud businesses.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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