Moreover, after quarterly figures from these US tech behemoths has come whopping jobs creation data that hit US stocks yesterday. Higher interest rates are yet to tame economic vigour and, while US consumer inflation is down to 3.4%, it is a way off central banks’ 2% target.
Potentially, there is a parallel with 1964 to 1981 when the US economy was generally strong, yet stocks did not proportionally benefit due to inflation and tight monetary conditions persisting.
Massive rebound as interest rate expectations shift
I believe much of the volatility in Meta and Amazon is explained by shifting expectations for interest rates and the economy over the past two to three years. Intrinsically, Meta is sensitive to advertising trends given this constitutes 98% of its revenue, and Amazon to discretionary consumer spending, although Amazon deserves a higher rating given its cloud computing side should mean relatively consistent subscription-type revenues.
I drew attention to both as long-term buys in April 2019; Meta (then called Facebook) at $193, which advanced to $350 by mid-2021, but as expectations on interest rates changed, slumped to $93 by October 2022. The company reported falling ad revenues and higher costs, which conflated with a loss of confidence over CEO Mark Zuckerberg prioritising loss-making “metaverse” projects, where customers would experience a virtual reality world through headsets. Yet a powerful recovery has ensued to an all-time high of $475 on a trailing price/earnings (PE) ratio of around 32x and a 0.4% yield.
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Amazon has seen a quite similar dynamic, plunging to $84 in late 2022, now back around an all-time high of $172 last seen in 2020-21. Its PE is near 60x, although was 80x when I tipped the stock at $95 equivalent (pre-stock consolidation) and there is no yield. It does look to have the relatively more robust business model versus Meta’s exposure to advertising despite dominating social media. Zuckerberg has proclaimed “Facebook will always be free” unlike Elon Musk moving X towards a subscription model.
Aside from macro, has anything changed in investment rationales?
While I have concerns that growth ratings could contract again if market sentiment over interest rates shifts adversely – broadly, the cases for holding Meta and Amazon remain intact. I admit to concern over virtual reality and artificial intelligence (AI) increasing in media, but call me an older user!
I liked Facebook nearly five years ago given it was showing a 30% revenue advance, this reflected globally and with new users led by places such as India, Indonesia and the Philippines. Although since then, daily active users have grown from 2.7 billion to 3.2 billion, which is a lot, but should the growth have been more?
Quite a “moat” has been achieved. Facebook continues to appear pretty much the strongest social media platform, even if Instagram attracts those inclined at pouting. WhatsApp seems a great success, even if some questioned the $19 billion Facebook paid for it in 2014. Management was ahead of the curve in terms of telephony shifting from landline usage to digital voice. Given a decent router at both ends of a conversation, WhatsApp seems to deliver better-quality calls and it is free. Dedicated WhatsApp social/communications groups continue to proliferate.
A crux question is whether regulatory challenges to what is quite a monopoly, can be managed – as they were some five years ago when customer privacy and data issues were in focus.
I see the chief risk being the stock ratings: can PEs of 30 to 60 times be sustained over the very long run? I would not be a buyer of Meta or Amazon at current levels, the question is whether to use their latest results-driven rallies to lock in some gains.
Fourth-quarter 2023 operational momentum impresses
Amazon has cited a 27% annualised jump in sales and Meta more than tripled overall sales, chiefly ad revenues. Yet WPP (LSE:WPP) presented a challenged environment when last reporting on the third quarter of 2023. As a marketing services bellwether, and with its share price at around 775p, they’re back down to 2012 levels on a forward PE of 8x, yielding 5%.
Meta Platforms, Inc
Fourth quarter and annual 2023, summary income statement
|Three months ended 31 Dec
|12 months ended 31 Dec
|Cost of revenue
|R & D
|Net interest (charge)
|Profit before tax
|Diluted EPS $
Source: Meta Platforms, Inc.
Both these US companies also beat expectations strongly at various profit levels, and Amazon suggests its operating profit growth is durable. Meta guides its first quarter 2024 revenue in a 20-29% growth range and is initiating quarterly dividends. This affirms cash flow but, at 50 cents a share payable 26 March, implies a scant yield on a circa $475 stock. A further $50 billion of share buybacks are proposed, relative to a $1.2 trillion market value.
The CEO stuck to his guns in the latest earnings call, reiterating AI as the playbook for growth. He talks of Meta’s “large language model” being fully “open source”, hence a key difference from Microsoft Corp (NASDAQ:MSFT). He believes open source will become the industry standard, with Meta’s “Llama” language the most popular with developers, also enabling Meta to hire the best people.
It is all rather abstract, so depends what extent of investors will make an act of faith to accept it. Meta’s “Reality Labs” business breached $1 billion revenue in the fourth quarter, albeit with a $4.6 billion operating loss.
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2024 is set to be a “battle of the virtual reality headsets” with Apple Inc (NASDAQ:AAPL) currently launching a “Vision Pro” model to try and take some of Meta’s 55% market share. Yet Zuckerberg says the app needed for Meta’s headset was the most downloaded app on Christmas Day. I find this kind of thing really hard to judge, but who knows, it could be a hit with youngsters.
Overall, Meta said: “We expect growth will be driven by investments in servers, including both AI and non-AI hardware, and data centres as we ramp up construction of data-centre architecture.” Capital expenditure is thus expected to rise around $2 billion to $30-37 billion this year with total expenses guided at $94-99 billion as infrastructure costs rise.
That could turn out well on a three to five-year view, but looks capable of softening earnings growth especially if “high interest rates for longer” affects advertising.
Increasing legal and regulatory headwinds are also cited. “The Federal Trade Commission is seeking to substantially modify our existing consent order and impose additional restrictions...we are contesting...but if unsuccessful it would adversely impact the business.”
Zuckerberg still proclaims 2023 as “a pivotal year”, which could indeed be so operationally – Meta is leaner and more efficient as it also fully embraces AI. The “Threads” app was launched last July, linked to Instagram, with a functionality similar to X, hence it could take some share if disillusion with Musk sets in. According to recent data, Threads has 160 million users although growth has slowed lately.
Locking in some gains is prudent
I think this applies chiefly to Meta, hence this article’s focus on the Facebook firm. I question that fourth-quarter consumer strength is sustainable in the near term; also that “growth” stock ratings are exposed to another possible shift in interest rate expectations.
A case remains to hold both longer term, where Amazon looks less risky, but which is reflected in the PE ratings’ differential.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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