“Big tech” stocks have been in the news over the past year for all of the wrong reasons. Stocks that were previously considered to be “untouchable,” such as Meta Platforms Inc. (META, Financial) and Google parent Alphabet Inc. (GOOG, Financial)(GOOGL, Financial), saw their share prices butchered from their highs. However, recently these two big technology names have produced strong financial results for the first quarter of 2023, beating both revenue and earnings estimates for growth.
In this discussion, I will break down the results of each and analyze the business trends. Let’s dive in.
Meta Platforms
Kicking things off is Meta Platforms (META, Financial), formerly known as Facebook and the owner of platforms such as Instagram and WhatsApp. For the first quarter of 2023, the company reported $28.6 billion in revenue, which increased by 6% from the prior-year period on a foreign exchange rate neutral basis.
This was driven by a 5% boost in its advertising revenue, which rose to $28.10 billion. The advertising market is still depressed due to recession fears, but Meta did experience a rebound in commerce revenue, according to its earnings call.
The company is also gradually improving the monetization ability of its Reels short-form video format, which was launched in an effort to compete with TikTok.
According to the earnings call, Reels have proven to be “more challenging” to monetize than the Story video format, but progress is being made.
Meta reported a 30% year-over-year increase in it monetization efficiency for Reels and engagement has doubled since November 2022, with approximately 2 billion views per day achieved with this format.
Overall ad impressions delivered by its Family of Apps rose by a strong 26% year over year, which was positive. Its price per ad did decline by 17% year over year, but as the advertising market rebounds, Meta should come back stronger thanks to the greater number of ad impressions.
Meta Platforms has previously been criticized for slowing user growth, but the results were more positive in the first quarter.
Its Family of Apps, which includes Facebook, Instagram, WhatsApp and Messenger, reported a 4.7% increase in monthly active users to 3.81 billion people.
Moving onto margins, its operating margin contracted from 31% in the first quarter of 2022 to 25% in the most recent quarter. This may seem terrible, but keep in mind that 25% is still extremely respectable and greater than the 23% average for the software industry.
The company reported earnings per share of $2.20, which surpassed analysts' forecasts by 25 cents. This was despite earnings being down 19.1% year over year due to the aforementioned headwinds related to advertising.
Meta has a bulletproof balance sheet to continue to invest in the future in areas such as the “Metaverse.”
Its cash, cash equivalents and marketable securities equate to a solid $37.44 billion. In addition, the company has long-term debt of just $9.9 billion, which is manageable.
Its latest Oculus 3 headset is expected to be launched in October 2023, though the Reality Labs division is still generating heavy losses of roughly $3 billion as of the first quarter.
Valuation
Meta Platforms has seen its share price rebound by around 130% since November 2022 and thus, one may assume its valuation gap has closed. However, the company still trades with a price-sales ratio of 4.4, which is about 38% cheaper than its five-year average.
The GF Value Line also indicates a fair value of $380.71 per share and thus, estimates the stock is still significantly undervalued based on its historical ratios, past financial performance and analysts' future earnings estimates.
Alphabet
Alphabet (GOOG, Financial)(GOOGL, Financial), the parent company of Google, is the second major technology giant in the advertising industry. It is in a duopoly with Meta.
This company has also experienced strong headwinds related to the cyclical decline in the advertising industry.
Alphabet generates about 78% of its revenue from advertising and is, therefore, massively impacted by changes in the industry.
The search engine operator reported solid financial results for the first quarter of 2023. The company reported $69.79 billion in revenue, which rose by 2.6% year over year or 6% on a foreign exchange rate neutral basis. This is not a blistering growth rate, but still beat analysts' forecasts by over $950 million.
Google’s search business reported $40.4 billion in revenue, rising 2% year over year. This was despite fears that Google’s core search would be disrupted by the resurgence of Microsoft's (MSFT, Financial) Bing (and artificial intelligence-powered systems).
Google is not completely safe from artificial intelligence platforms such as GPT-4 just yet, but the company has continued to roll out its Bard generative AI tool in order to compete.
YouTube offers huge potential for Alphabet as it continued to evolve into a next-generation TV platform. Its ads revenue increased by 2.6% to $6.7 billion in the first quarter.
Further, YouTube TV has continued to grow with NFL Sunday ticket offerings. In addition, the “Shorts” video format has continued to grow, though it is also facing monetization issues similar to Meta’s Reels.
Google Cloud is a strong growth driver for the company and reported a 27.6% year-over-year growth rate to $7.4 billion.
The cloud industry is still in its early innings, but as the third-largest player in the industry (behind Amazon's (AMZN, Financial) AWS and Microsoft's Azure), Google Cloud is poised to continue capture market share.
Similar to Meta, Alphabet has a robust balance sheet with a staggering $115 billion in cash, cash equivalents and short-term investments. Its debt levels are also relatively low at just $13.7 billion.
Valuation
Alphabet’s share price did not drop as low as Meta, but has still recovered by around 18% since the start of the year.
Its price-sales ratio of 4.5 is about 26% cheaper than its five-year average.
The GF Value Line indicates Alphabet has a fair value equal to $146 per share and thus, the stock is modestly undervalued currently.
Final thoughts
Both Meta and Alphabet are giants of the advertising industry. They have both experienced headwinds related to the pullback in advertising spend, but despite this have still beat earnings estimates for the first quarter. It is too early to call a full recovery, given the growth rates of both companies are still relatively slow and we are in the midst of a pending recession. However, these stocks should prove to be solid investment opportunities in the long term given their sheer scale and dominance.
