Regular readers of The Motley Fool would not need reminding that technology shares took a brutal beating in 2022.

But with the S&P/ASX All Technology Index (ASX: XTX) up 15.5% already this year, one expert has declared the sector is back with a vengeance.

DeVere Group chief executive Nigel Green said that financial updates from US tech giants this week would commence "The Great Rotation back into growth stocks".

"As market conditions shifted in 2022, investors dumped growth stocks, like tech, in favour of value stocks which were deemed more suitable to the challenging environment," he said. 

"But what is happening now, we believe, is the beginning of a rebound."

Mixed results for tech giants

Green did admit the short-term results for big tech were mixed.

"Facebook's parent company Meta Platforms Inc (NASDAQ: META) has exceeded estimates for revenue in its fourth-quarter earnings report, with the stock soaring in extended trading on the results," he said.

"While Amazon.com Inc (NASDAQ: AMZN)'s earnings are expected at $0.15 per share, which would be an 89% decrease from the same quarter in 2021."

Green predicted that Apple Inc (NASDAQ: AAPL) would see declining revenue for the first time since early 2019.

"Alphabet Inc (NASDAQ: GOOGL), the parent company of Google, is expected to report a third consecutive quarter of declining earnings."

But this won't stop long-term investors piling back into the tech sector, according to Green.

He cited two reasons why The Great Rotation is on in earnest.

"First, valuations of tech and other growth stocks are currently low having been hit by the previous rotation into value stocks," said Green.

"Investors are now eyeing these super attractive entry points to top-up their portfolios as the trend is reversing."

Secondly, investors are looking forward to how macroeconomic factors might change.

"Inflation has seemingly peaked and interest rates are set to stabilise, which takes away a major obstacle for tech stocks."

Bet on still-cheap tech for strong returns 

Green thus declared that "tech stocks are back" and urged punters to take advantage.

"Rotation into the right growth stocks will provide strong returns."

He warned, though, that this is not a time for investors to "buy everything".

"There will be big winners and losers. They must concentrate on high quality, profitable companies which can consistently maintain or steadily grow margin[s]."

And despite lukewarm results, the tech giants shouldn't be written off.

"[They] still have piles of cash, in some cases hundreds of billions of dollars, and remain enormously profitable," said Green.

"In addition, these companies maintain considerable user bases, world-class research and development, plus some of the smartest talent on the planet."

The post 'The Great Rotation' has begun: Expert declares tech shares will provide 'strong returns' in 2023 appeared first on The Motley Fool Australia.

The US markets had a very pleasing day of trading last night (our time). By the end of the trading day, the S&P 500 Index has risen by 1.05%, while the NASDAQ 100 was up an even rosier 2.16%. But let's talk about the Meta Platforms Inc (NASDAQ: META) stock price.

Meta, the company formerly known as Facebook, looked like it had a pretty decent day on the surface. The company closed at US$153.12 a share, up a robust 2.79%. But in after-hours trading, the story was dramatically different.

By the time after-hours trading finished up, Meta shares had risen by a whopping 19.81% all the way up to US$183.45 each.

So what was behind this dramatic jump in value?

Well, the company's latest earnings report, of course.

Meta has been under intense pressure over the past two years or so. Between September 2021 and November 2022, the company's shares fell from close to US$380 to just over US$88. That's a fall of over 76%:

Ouch.

Investor concerns ranged from increased competition to Meta's social media apps like Facebook and Instagram from rivals like TikTok to Meta's ambitious and expansive plans to expand into the 'metaverse'.

But it appears that the company's latest quarterly earnings report has restored a lot of faith.

Meta stock jumps, but why?

But, initially, it's not too easy to see why.

Meta reported falls in revenue, income and earnings per share (EPS) for the quarter ending 31 December 2022. Against the prior corresponding quarter, the company's revenue fell 4% to US$32.17 billion. Net income dropped 55% from US$10.29 billion to US$4.65 billion. Diluted EPS also fell, sliding from US$3.67 per share to US$1.76.

The only positive metric was a big reduction in costs and expenses. These dropped from US$12.59 billion for the three months to December 2021 to US$6.4 billion for the three months to 31 December 2022.

So what then has gotten investors so excited with Meta shares?

The company has announced a massive increase to its share buyback program.

Meta reported that over the quarter just gone, the company bought back US$6.91 billion of its own stock. That took 2022's annual total to US$27.93 billion, with US$10.87 billion left in the kitty for further buybacks.

But Meta announced this morning that it would be increasing its funds available for buybacks by a whopping US$40 billion ($56 billion).

Investors love share buybacks because they reduce the total share count of a company. This has the effect of reducing supply, therefore pushing up share prices over time. Further, a reduced share count increases earnings per share, since there are fewer shares to divide a company's earnings amongst.

So it's this monster expansion to Meta's share buyback program that has probably gotten investors so hot under the collar for Meta stock.

The post Meta stock price rockets 19% on $56 billion buyback appeared first on The Motley Fool Australia.

S&P/ASX 200 Index (ASX: XJO) tech shares are broadly enjoying a strong run today.

In late morning trade, the ASX 200 is up a healthy 0.5%.

But tech shares are faring even better. The S&P/ASX All Technology Index (ASX: XTX) – which contains some smaller tech stocks outside of the ASX 200 – is up 3% at this same time.

As for ASX 200 tech shares, these three are leading the charge on Thursday:

• Shares in WiseTech Global Ltd (ASX: WTC), a provider of cloud-based software solutions for the logistics sector, are up 5.1%
• Accounting software provider Xero Limited (ASX: XRO) is up 7.2%
• And shares in Megaport Ltd (ASX: MP1), which provides Network as a Service (NaaS) solutions, are up 5.7%

You certainly won't hear investors complaining about those figures!

So, what's driving today's rally?

What's driving the tech stock rally today?

There are no price-sensitive releases out from any of these three ASX 200 tech shares today.

Which tells me the rally is broadly being driven by two factors.

First, Facebook owner Meta Platforms (NASDAQ: META) reported strong quarterly sales overnight and announced a US$40 billion (AU$56 billion) share buyback. The Meta share price has surged 20% in after-hours trading on the news, offering some strong tailwinds for the tech sector.

Second, investors look to be rewarding the ASX 200 tech shares following the subdued interest rate hike from the US Federal Reserve. That helped the Nasdaq Composite Index (NASDAQ: .IXIC) close 2% higher overnight.

Why celebrate a rate increase?

Because the 0.25% hike, while broadly expected, is the lowest increase the Fed has delivered in some time, having boosted rates by 0.50% in December and by 0.75% at its four prior meetings.

Though warning that investors can expect several more rate hikes, Fed chair Jerome Powell said inflation pressures in the United States are showing signs of easing.

That's particularly welcome news for most tech companies, which are often priced with future earnings growth in mind. As interest rates ratchet higher, so too does the present cost of investing in those earnings.

How have these ASX 200 tech shares been tracking?

After a difficult second half of 2022, two of the three ASX 200 tech shares named above are off to a smashing start.

As you can see on the below charts, Megaport is the only one that remains in the red for 2023, down 2.9% from the opening bell on 3 January.

WiseTech shares, on the other hand, have leapt out of the gate, up 27.5% in the new year.

And Xero is no laggard either, with shares up an impressive 17.6% so far in 2023.

The post 3 ASX 200 tech shares going gangbusters on Thursday appeared first on The Motley Fool Australia.

The US stock market could be in for a riveting week amid multiple household names reporting.

Analysts at ANZ Group Holdings Ltd (ASX: ANZ) are tipping the US Fed to raise rates at a meeting later this week.

The S&P 500 Index (SP: .INX) slid 1.3% overnight, the Dow Jones Industrial Average (DJX: .DJI)slipped 0.77% and the Nasdaq Composite Index (NASDAQ: .IXIC) slipped 1.96% on Monday, US time.

What's ahead?

ANZ highlighted it is a "big week for both central banks and US equities" in a research report released this morning.

Among the US stocks due to report earnings are Apple Inc (NASDAQ: AAPL), Meta Platforms Inc (NASDAQ: META), Caterpillar Inc (NYSE: CAT), McDonald's Corp (NYSE: MCD), General Motors Company (NYSE: GM), United Parcel Service Inc (NYSE: UPS) and Alphabet Inc Class A (NASDAQ: GOOGL).

ANZ senior economist Felicity Emmett said these earnings announcements will provide a "micro overview of the macro economy". She added:

Investors bought into the 'soft landing' view in early 2023, despite the prospect of what could still be a bumpy ride for activity as the lagged effects of last year's interest rates front-loading and still-high inflation bite. 

Meanwhile, the United States Federal Open Market Committee (FOMC) is due to announce an interest rate decision on Thursday morning, Sydney time. ANZ is forecasting a 0.25% rate rise.

Commenting on this outlook, ANZ's Emmett said:

We expect a 25bp rate rise and anticipate that the Fed will caution against an early pause in the tightening cycle and certainly give the notion of cuts no rein.

Risk appetite could be vulnerable to a correction.

US stock market snapshot

Meta shares fell 3% on Monday and have shed 53% in the last year.

Apple Inc (NASDAQ: AAPL) shares lost 2% on Monday and have slid 18% in the last year.

Alphabet shares slid 2.74% on Monday and have tumbled 28% in the past year.

McDonalds shares dropped 0.58% on Monday but have climbed 4.41% in the last 52 weeks.

General Motors shares shed 4.37% on Monday and have slumped 31% in the last year.

Caterpillar shares fell 1.11% on Monday but have soared 29.74% in the past year.

The United Parcel Service share price lost 2.81% on Monday and has slid 12.48% in the last year.

Meanwhile, the S&P 500 Index has shed 11% in the last year, while the Dow Jones has lost 4% in a year and the Nasdaq Composite has shed nearly 20% in the past 12 months.

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Fortescue Metals Group Limited (ASX: FMG) shares are taking the conveyor belt lower today after a cracking start to the year.

As we enter mid-afternoon trading, investors in one of Australia's biggest iron ore producers are taking their foot off the gas pedal. In a subdued start to the week, the company's share price is down 0.58% to $22.47. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is faring slightly better, with a minor gain of 0.03% so far today.

The negative move comes after the completion of the annual World Economic Forum event held in Davos, Switzerland, where climate change was once again a topical point of discussion. Fortescue founder and executive chair Andrew Forrest attended the event spruiking the efforts of Fortescue Future Industries (FFI), starting from around 25:30 in the clip below.

However, one portfolio manager believes the green hydrogen business could be a red flag for Fortescue shares.

Rock digging and reinvention

Aside from being industry giants, it's hard to see much resemblance between Fortescue and Facebook-owner Meta Platforms Inc (NASDAQ: META). However, Ben McGarry of Sydney-based Totus Capital thinks there might be a worrying similarity between the two.

Speaking to the Australian Financial Review, McGarry revealed the funds' short positioning in Fortescue Metals shares. Delving into the reasoning, he highlighted how the expensive FFI venture of the Forrest-led miner was uncanny to Meta's cash-incinerating metaverse hopes.

The worry stems from Fortescue's plan to tip 10% of its net profit after tax (NPAT) into the green dream. For FY22, that would work out to be approximately US$620 million.

It's a large sum of money to be burning on undeveloped technology, especially in a cyclic industry such as resources. However, Andrew Forrest believes the company could save around $1 billion annually by running its iron ore operations on green hydrogen.

Likewise, Meta has chewed through enormous capital as it searches for a new growth engine in virtual and augmented reality. Since 2021, Mark Zuckerberg's pet project has gobbled up US$15 billion.

The rampant spending at Meta comes at a time when revenue growth is declining, as shown below.

Clearly, McGarry and the Totus team are worried that Fortescue might similarly be spending good money after bad.

Are Fortescue shares cheap?

If you're thinking like a contrarian, you might ask yourself if Fortescue shares are 'cheap' now.

The Australian mining giant currently trades on a price-to-earnings (P/E) ratio of around 7.8 times earnings. This is mostly on par with its peers, such as BHP Group Limited (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).

It's worth noting that Fortescues' earnings are forecast to decline in FY23 and FY24. According to estimates, earnings per share (EPS) could be 45% less in FY24 than in FY22.

All else being equal, that would push the P/E ratio up 45% to around 11.3 times — roughly in line with the industry average.

The post Why Fortescue shares could be facing a Meta-like problem appeared first on The Motley Fool Australia.

You might not realize it, but two weeks ago marked one of the most important data releases of the quarter. November 14 was the last day for money managers and wealthy individuals with at least $100 million in assets under management to file Form 13F with the US Securities and Exchange Commission.

A 13F lets Wall Street professionals and everyday investors have a look under the hood to see what the brightest minds on Wall Street bought, sold, and held in the most recent quarter. Even though 13Fs have their flaws -- they're at least six weeks old by the time they're filed, meaning additional trades may have been made -- they can help investors identify the companies and trends garnering the attention of top money managers.

Although most billionaire money managers have used the 2022 bear market as an opportunity to buy high-quality companies at a discount, others haven't been able to run to the exit quickly enough. What follows are three ultra-popular stocks billionaires have been busy selling.

Tesla

There's arguably no stock billionaires sold more aggressively during the third quarter than electric-vehicle (EV) manufacturer Tesla (NASDAQ: TSLA). All told, five billionaire money managers pressed the sell button, including Jim Simons of Renaissance Technologies, Jeff Yass of Susquehanna International, Philippe Laffont of Coatue Management, Ken Griffin of Citadel Advisors, and Israel Englander of Millennium Management. Simons reduced his fund's stake by 99.9%, while the four other billionaire fund managers reduced their stakes by 16% to 55%.

Why run for the exit? One reason may be the realization that Tesla isn't immune to the cyclical challenges facing the auto industry. Tesla has historically been valued at a nosebleed premium to legacy automakers on the notion that it'll outpace these stalwarts in the sales and profit-growth department. However, COVID-related supply chain disruptions, especially in China, coupled with historically high inflation and a weaker US and global economic outlook, bode poorly for near-term EV sales.

Perhaps an even bigger downside catalyst is Tesla's own CEO Elon Musk. Although Musk is a visionary who's been largely credited with helping Tesla become one of the world's largest publicly traded companies, he's also become a significant liability for the company. Aside from the significant distraction of operating social media site Twitter, a large number of promises regarding the debut of new vehicles or innovations have failed to come to fruition. Tesla's valuation is very much dependent on Musk's visions becoming reality.

On the bright side, Tesla is profitable on a recurring basis, and the ramp-up at its two new gigafactories (Berlin, Germany, and Austin, Texas) should allow production and sales to quickly scale. But maintaining its North American market share will undoubtedly prove difficult as legacy automakers and newer players scale their own EV operations.

Walt Disney

Disneyland may be the "Happiest Place on Earth," but Walt Disney (NYSE: DIS) has been nothing short of a frowny face for billionaire investors. During the third quarter, billionaires Ole Andreas Halvorsen of Viking Global Investors, Simons of Renaissance Technologies, and Ray Dalio of Bridgewater Associates, all sold shares. In particular, Halvorsen and Dalio completely exited their respective fund's positions in Disney.

The about-face we've witnessed in Disney stock can likely be explained by two factors. First, the company still hasn't put its operating issues tied to the COVID-19 pandemic into the rearview mirror. China's zero-COVID strategy continues to hamper Disney's theme-park operations. Additionally, traditional moviegoing hasn't come close to achieving its pre-pandemic level.

The other issue is that Walt Disney's streaming services are racking up some jaw-dropping losses as they scale. While direct-to-consumer revenue rose 8% in the company's fiscal fourth quarter (ended Oct. 1, 2022), the segment's operating loss nearly doubled to $1.5 billion.  Poor operating performance is not something Disney shareholders are used to.

However, the subscriber figures at Disney+ (164.2 million) have ramped up incredibly fast, and the company appears confident the segment will turn the corner to profitability by the end of fiscal 2024.

What's more, Walt Disney has exceptional pricing power and the ability to engage consumers like no other media company. In short, these billionaire sellers may ultimately regret their decision.

Meta Platforms

The third ultra-popular stock billionaires were busy selling in the third quarter is social media behemoth Meta Platforms (NASDAQ: META). Billionaires Stephen Mandel of Lone Pine Capital, Griffin of Citadel Advisors, and Simons of Renaissance Technologies, all slashed their stakes in Meta by multiple millions of shares from the sequential second quarter.

Perhaps the biggest knock against Meta is a weakening macroeconomic outlook for the US and global economy. Advertising is one of the first spending categories to be hit when the winds of recession begin blowing. Given that Meta generates 98% of its revenue from advertising, its top and bottom line are directly impacted by economic weakness.

Another plain-as-day concern billionaires have about Meta is CEO Mark Zuckerberg's exorbitant spending on the metaverse -- the 3D virtual world that allows users to interact with each other and their environment. Reality Labs, the company's metaverse operations, recorded $1.4 billion in sales through the first nine months of 2022, but racked up a jaw-dropping $9.4 billion in losses.  Worse yet, spending is expected to increase in 2023. The end result has been reduced free cash flow and lower quarterly profits.

But as with Walt Disney, I'm skeptical of the skeptics. Meta owns four of the most popular social media assets on the planet (Facebook, Facebook Messenger, WhatsApp, and Instagram) and should benefit from strong pricing power during extended periods of economic expansion.

Furthermore, Meta is sitting on a healthy net cash pile totalling nearly $32 billion. The company has levers it can pull if it wants to boost its free cash flow. The point being that Meta Platforms' operating model is so dominant, and its balance sheet so flush with cash, it has the financial flexibility to make aggressive investments in the metaverse. After all, the metaverse could be the next multitrillion-dollar opportunity.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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As 2022 starts to close, it's only natural for investors to start peeking toward 2023. So far in 2022, the indexes have fared pretty miserably, with the Nasdaq-100 down 29% and the S&P 500 down 17%. Which one will have a better 2023?

Let's look at these indexes and their makeups and find out which is more likely to have a better 2023 ahead.

The indexes are highly concentrated on the top

At the top, the indexes have a lot of overlap.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

Data source: Slickcharts. Data as of Nov. 19. *Note: Both Alphabet class shares combined.

As you can see, Apple, Microsoft, Amazon, and Alphabet make up a considerable chunk of these indexes. In the S&P 500, they account for 19.83%. It's basically double for the Nasdaq-100, with that group making up 39.16% of the index. It's pretty straightforward: How these companies do will significantly steer how the overall index does.

While these three are tech-focused, they compete in different markets. Both Apple and Amazon are a good measure of the pulse of the consumer, as their sales are highly affected by consumer sentiment. If inflation cools, and consumers don't need to worry about rising grocery prices or housing costs, they may treat themselves to the latest device.

Alphabet and Microsoft are business-focused, but for different reasons. Alphabet's primary revenue stream is advertising, and many clients have pulled back their spending levels in 2022 due to the uncertain business environment. If the outlook improves, expect this revenue to return. Microsoft's cloud business and Office product suite indicate how willing businesses are to spend on their infrastructure, but Microsoft's consumer product division also indicates how individuals are doing. 

If the consumer gets stronger and business outlook improves, these four will boom. If that's the case, then the Nasdaq-100 will likely have a better year because it is concentrated in companies that will benefit the most. But if 2023 brings an economic recession, the S&P 500's diversity will help it to outperform the Nasdaq-100.

The companies outside the top five are very different

For the S&P 500, when you move out of the top five, the companies become much more diverse.

Data source: Slickcharts. Data as of Nov. 19.

Now, there are industrials, healthcare, and energy sectors represented, giving the index some much-needed balance. Looking at the top 20 reveals even more diversity, with financials, energy, and healthcare rounding the index out.

This is far from the case for the Nasdaq-100.

Data source: Slickcharts. Data as of November 19. Note: Both Alphabet class shares combined.

Besides Pepsi and Costco, these companies are more in the tech sector. But, unlike the S&P 500, it doesn't get much better outside the top 10, with most of the top 20 consisting of chipmakers, communication companies, and software businesses. Now, this probably isn't a surprise because the media often refers to this index as the "tech-heavy Nasdaq."

Still, tech businesses don't do well if the economy is struggling.

Does that mean you should write the Nasdaq-100 off? Absolutely not. Tech stocks tend to do very well in the recovery phases of a recession. Plus, the stock market is forward-looking, and stocks usually tend to do better during a recession than leading up to one.

That last tidbit of information should keep investors in the market, especially now with a recession, or at least an economic slowdown, imminent. However, if you're trying to decide which index to buy, you need to utilize the 2023 outlook. If you think 2023 will be a repeat of 2022, then the S&P 500 is the better choice. On the other hand, if you believe the economy will begin to recover and the Federal Reserve eases its interest rate hikes, then the Nasdaq-100 is the place to be.

One last point: There's nothing wrong with owning both indexes if you don't know what 2023 will bring. Personally, I think this is an intelligent strategy, as it gives investors the upside of recovery and the safety of a balanced investment.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Facebook rebranded itself as Meta Platforms (NASDAQ: META) on Oct. 28, 2021. Since that fateful day, Meta's stock declined more than 60% as it repeatedly disappointed its investors with its sluggish growth, feverish spending, and opaque plans for the future. Rising interest rates and other macro headwinds exacerbated that painful sell-off.

That crash stunned many investors who considered Meta to be reliable blue-chip tech stock. Let's compare the main reasons to buy, sell, and hold Meta to see if this out-of-favor tech giant will finally bounce back in 2023.

Image source: Meta Platforms.

The main reasons to sell Meta

Before we discuss Meta's turnaround potential, we should review why its stock collapsed over the past year. First, the growth of its core advertising business stalled out for three main reasons: 1. Apple's (NASDAQ: AAPL) iOS update crippled its targeted ads; 2. ByteDance's TikTok lured users and advertisers away from Facebook and Instagram; and 3. The macroeconomic headwinds disrupted the growth of the broader advertising market.

Meta aggressively invested in the expansion of Instagram Reels to counter TikTok, but it warned that those short videos would be more difficult to monetize than its Feed-based ads. But instead of streamlining its business to offset those costs, Meta doubled down on expanding its Reality Labs segment, which houses its virtual reality products. That segment's revenue rose less than 3% year over year to $1.43 billion in the first nine months of 2022, but its operating loss widened from $6.89 billion to $9.44 billion. During last quarter's conference call, Meta's CFO Dave Wehner warned that the Reality Labs division's operating losses would still "grow significantly year over year" in 2023 as it rolls out its next Quest headset. Wehner also estimated that Meta's total expenses would rise from $85 billion-$87 billion in 2022 to $96 billion-$101 billion in 2023.

That toxic mix of slowing growth and rising expenses drove away the bulls. Analysts expect its revenue and earnings to drop 2% and 33%, respectively, this year. For 2023, they expect its revenue to rise 5% -- but for its earnings to tumble another 15% as its expenses continue to climb. We should take those estimates with a grain of salt, but we should also recall that Meta's insiders sold nearly four times as many shares as they bought over the past 12 months.

The main reasons to buy or hold Meta

The bulls believe Meta's stock is a screaming bargain at 12 times forward earnings. That makes it the cheapest FAANG stock by a wide margin. They'll also note that Meta's recent decision to lay off 13% of its staff, or about 11,000 employees, indicates CEO Mark Zuckerberg is finally ready to make some tough calls to stabilize its near-term margins. In an open letter to his employees, Zuckerberg said Meta needed to "become more capital efficient" to cope with the "macroeconomic downturn, increased competition, and ads signal loss." In addition to those layoffs, Zuckerberg said Meta was also "scaling back budgets, reducing perks, and shrinking our real estate footprint" as it prioritized the growth of its core businesses.

Those statements suggest that Meta will pour a lot less cash into its money-losing Reality Labs division while prioritizing the development of better first-party data mining services (which could reduce its dependence on third-party data from Apple or other operating system providers) and the expansion of Instagram Reels to keep pace with TikTok.

During Meta's last conference call, Dave Wehner said the company was "working to close" the monetization gap between Reels and its higher-value Feed and Stories, but that it could take another 12 to 18 months to do so. That process could be accelerated significantly if the U.S. Government finally bans TikTok over its ties to the Chinese government.

Meta's growth will likely remain sluggish over the next few quarters, but the worst-case scenario has arguably been priced in. Meanwhile, the potential tailwinds for the tech giant -- including a revival of its ad business with first-party data, the downsizing (or complete shutdown) of Reality Labs, and a national ban on TikTok -- aren't reflected in its current valuation yet. If the market merely values Meta at 18 times forward earnings, its stock price could easily rise about 50%.

Which argument makes more sense?

I personally think it's too late to sell Meta at these levels, especially if cooler inflation drives stocks higher over the next few months. Meanwhile, investors who already own Meta's stock should probably simply hold it for a few more quarters and see if its business improves or deteriorates. However, I also think it's still too risky to buy Meta's stock before a few green shoots actually appear. Therefore, I believe Meta will be a stock to hold -- instead of being too bearish or bullish on -- in 2023.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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What happened

FAANG stocks Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Netflix (NASDAQ: NFLX) jumped today after the October Consumer Price Index report showed inflation cooling off faster than expected.

According to the Bureau of Labor Statistics, consumer prices jumped 7.7% year over year in October, below expectations of 7.9%, and the October reading marked the slowest year-over-year growth rates since January. On a monthly basis, inflation was up 0.4%, below expectations of 0.6%.

Core inflation, which excludes more-volatile food and energy prices, was also lower than expected, rising just 0.3% from September and 6.3% over the last year.

The news makes it more likely that the Federal Reserve will slow the pace of its interest rate hikes, leading Treasury yields to plunge while stocks rallied on the news. Rising interest rates make bonds more attractive by comparison, but falling rates tend to attract money out of bonds and into stocks. 

As of 11:20 a.m. ET on Thursday, Alphabet stock was up 7.1%, while Meta had gained 7.2%, and Netflix was 5.6% higher. At the same time, the Nasdaq had jumped 5.8%, and the 10-year Treasury yield fell 7.5% to 3.85%, its lowest point in a month. 

So what

All three of these FAANG stocks are sensitive to consumer spending and, therefore, inflation and interest rates. They also make much of their money from outside the U.S., and falling Treasury yields weakened the dollar, which fell 2% against a basket of currencies this morning.

Alphabet stock has dropped sharply over the past year on concerns over a slowing economy and possible recession. The business' performance has taken a hit from macroeconomic headwinds, with revenue growth slowing to just 6% in its third quarter, or 11% in constant currency.

Advertising is a cyclical business, and it's generally one of the first expenses that businesses pull back on when they sense that demand is slowing or they need to cut costs. With inflation falling faster than expected, the bottom of the economic cycle could arrive sooner than investors had thought, which would be good news for Alphabet's Google since it's the leading digital advertising business.

Facebook parent Meta Platforms has faced similar headwinds, with its revenue shrinking in its most recent quarter. The company noted macroeconomic challenges in its most recent earnings report, but competition from TikTok, as well as Apple's ad-targeting restrictions, are also impacting its growth.

In a clear sign of the challenges the company faces, yesterday it laid off 11,000 employees, or 13% of its workforce. Meta has also been spending aggressively on its metaverse project, and investors might be more permissive of that spending if they believe interest rates will soon peak, since the cost of losing that money, measured by the net present value, goes up as interest rates increase.

Lastly, Netflix is a consumer-driven business whose subscription model makes it less sensitive to the macro-level economy than consumer discretionary companies that depend on one-time purchases, like restaurants and travel busineses. However, competition has increased significantly in video streaming, and higher prices are likely to cause some consumers to reconsider their streaming budget.

Netflix also has $14 billion in debt, some of which it's likely to roll over in the coming years, so lower interest rates are to its advantage there. It's also launching its advertising tier this month, and a recession could hurt momentum in that new business.

Now what

Of the three of these stocks, Alphabet seems the most sensitive to the macro climate as the digital advertising leader, and its performance -- especially for Google Search -- is something of a bellwether for the overall economy.

Meta is currently struggling with cash burn from its metaverse project and competition in its ad business. But the stock has become so cheap that a shift in market sentiment would give it some much-needed momentum to recover. 

And Netflix's future will mostly be determined by the success of its new ad tier and its ability to win against a wide range of streaming options. But the stock would still be better off if the global economy can avoid a recession.

All three stocks should benefit if inflation continues to cool off, but Meta and Netflix face more-immediate challenges that investors will be watching closely.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why FAANG stocks were soaring today appeared first on The Motley Fool Australia.

Appen Ltd (ASX: APX) shares are up 2% in morning trade, having opened 2.5% higher.

This will come as welcome news to shareholders in the beleaguered artificial intelligence data services company.

Appen shares have come under heavy selling pressure this year alongside some of its biggest customers and revenue earners, like Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc (NASDAQ: META).

Or Google and Facebook, to you and me.

The Meta share price is down a whopping 71% this calendar year, while Alphabet's shares have plunged 39%.

Little wonder then that the Appen share price has also been in freefall.

But there may be a light at the end of the tunnel for the ASX tech stock's shareholders.

Why the picture could be getting brighter

With Appen's share performance significantly impacted by the outlook for the big US tech stocks, Julian Emanuel, senior managing director at Evercore ISI, offers a fairly bullish forecast.

Emanuel said investors shouldn't conflate this year's tech woes with the dotcom-bubble burst in 2000, indicating the tech sector will rise again.

According to Emanuel (quoted by Bloomberg), "This is not like 2000. Over the last 10 years we have gotten to this point where the returns were driven by a handful of stocks."

The handful of stocks in question include Meta and Alphabet, part of the so-called giant tech FAANG stocks. (Though with the Facebook and Google name changes, the proper acronym would now be MAANA, not quite as catchy.)

Emanuel said the FAANG (or MAANA) stocks are likely to trade in a tight range from here until "earnings catch up to valuations".

"Long-term, those are still secular growers; they're just not going to prop up the market to the extent that they have," he said, in what could prove to be good news for Appen shares down the road.

How have Appen shares been tracking?

Appen shares are down a painful 77% in 2022. For some context, the All Ordinaries Index (ASX: XAO) is down 10% year to date.

The post Could this imply light at the end of the tunnel for Appen shares? appeared first on The Motley Fool Australia.

What happened

Shares of Meta Platforms (NASDAQ: META) finally reversed their ongoing slump Tuesday morning, US time, climbing as much as 4.6%. By 2:22 p.m. ET, the stock was still up 3.8%.

The social media titan finally got some (potentially) good news, as government regulators consider banning one of the company's strongest competitors.

So what

A commissioner with the Federal Communications Commission (FCC), Brendan Carr, said in an interview with Axios that the Committee on Foreign Investment in the US (CFIUS) should ban short-form video platform TikTok. The company is currently in talks with CFIUS, which is charged with governing foreign companies operating in the US and conducting national security reviews. The regulatory body has been working to determine if TikTok should be spun off from its Chinese parent, ByteDance, in order to continue operating within the US. 

While the FCC itself has no regulatory authority over TikTok, as one of five commissioners at the FCC, Carr's opinion has a lot of sway in Washington, DC. Early last year, Carr recommended strong action against Chinese telecom companies, citing a "glaring security loophole" that permitted unsecured devices to operate on US networks. Acting on that warning, Congress passed the Secure Equipment Act of 2021, which gave the FCC power to effectively ban the use of telecom gear manufactured by Chinese companies Huawei and ZTE, which were viewed as a potential threat to national security. 

TikTok and the Biden administration are said to have come to a preliminary agreement to address these national security threats, but the Department of Justice has expressed concerns that the limitations framework doesn't go quite far enough to prevent TikTok's user data from being accessed by the Chinese government. The Treasury Department is also said to be skeptical of a potential deal.  

Now what

Meta Platforms has cited growing competition as one of several reasons for the company's back-to-back quarters of declining year-over-year revenue. CEO Mark Zuckerberg cited rival TikTok as the catalyst for Meta's focus on Reels, the short-form video option debuting across the company's social media platforms.

Nevertheless, Meta's willingness to adapt to a changing social media landscape has helped the company stay at the head of the class, making the stock a long-term buy.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Meta Platforms stock (finally) gained ground Tuesday appeared first on The Motley Fool Australia.

Bear markets can often feel like doomsday events for investors, but there's good that comes out of these healthy downturns. Bear markets separate the wheat from the chaff.

In other words, they make apparent the companies that are worthy of investor dollars, as well as those that probably should have never gone public in the first place.

There's one very distinguishable trait that nearly all bear market winners have in common: Healthy cash levels on their balance sheets.

Having a lot of cash allows strong companies to take advantage of cheap valuations in the form of acquisitions.

While cash-poor companies struggle to keep their boats afloat, those with strong balance sheets can bolster their businesses by buying out their competitors or acquiring entire new product lines.

How to identify a cash-rich balance sheet

If diving deep into financial statements isn't your thing, then you're in luck, because identifying a strong cash position is very easy.

Simply add the cash and cash equivalents and short-term investments/securities lines on the balance sheet, and you'll arrive at the company's total cash.

Comparing this number to the current liabilities (expenses the company will pay in the next 12 months) gives you a good idea of how cash-rich the business is.

Take Shopify (NYSE: SHOP), for example. The company has nearly $7 billion in cash and only $700 million in current liabilities. Not only does that tell us the company is more than capable of self-funding its operations, it also has plenty of cash to deploy in this bear market.

Winners from past bear markets

Some of the most prolific and profitable companies today were built on tremendous acquisitions made when the market was selling off.

Had these companies not had adequate cash reserves during these periods, they would likely not be nearly as prominent as they are today.

Let's take a look at some examples:

Data source: Public company filings and box office data. Table by author. * Does not account for revenue from Disney Plus subscribers.

In the wake of the Great Financial Crisis, Disney made one of the most important acquisitions in film history, buying up a relatively obscure comic book company called Marvel. As we all know now, the Marvel Cinematic Universe is one of the world's most successful franchises, bringing in a whopping $2.8 billion in annual revenue for Disney.

That number is pretty astounding, considering the company only paid $4 billion to acquire Marvel. And the real annual revenue is likely much higher, since it's difficult to estimate how much of Disney's streaming revenue is due to its Marvel titles.

If the Marvel acquisition looks impressive, then the YouTube and Instagram buyouts are downright silly. Alphabet paid just $1.65 billion for YouTube in the years following the dot-com bubble, and today it accounts for $28 billion in revenue for the Google parent company.

Meta (at the time Facebook) might have made the greatest acquisition of all time when it bought Instagram for a ridiculously cheap price of $1 billion in 2012. Today, Instagram accounts for roughly 44% of Meta's total revenue. To call this acquisition a home run would be the understatement of the century.

All three companies owe a meaningful amount of their success to the high-quality acquisitions made in past down markets.

Cash-rich companies are uniquely positioned to prosper in recoveries

The examples above highlight just how important it is to have cash in bear markets. An abundance of capital not only protects the business from bankruptcy, it gives the company the ability to buy up cheap assets to strengthen its competitive advantages.

Very few acquisitions will be as dramatically important as the examples above, but the discounts created by bear markets can turn average buyouts into meaningful sources of revenue and income in the future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Much of the commentary around Meta Platforms' (NASDAQ: META) disastrous third-quarter earnings report focuses on the prolific spending related to the metaverse. The Reality Labs segment, responsible for the company's virtual reality and metaverse initiatives, posted an operating loss of $3.67 billion and generated just $285 million of revenue.

Meta expects operating expenses tied to Reality Labs to surge further in 2023. This outlook is a big reason why shares of Meta had tanked more than 20% by Thursday afternoon. The company's aggressive plans to invest in its data centers got a bit less attention.

Betting big on AI

Meta needs plenty of compute capacity to handle the billions of users who scroll through Facebook and Instagram each month. But your standard data center server isn't going to be able to handle artificial intelligence (AI) workloads efficiently. Beefy graphics cards or specialized chips tailor-made for AI are required to run AI workloads at scale.     

Meta has decided that it needs to upgrade its data center footprint to support next-gen AI hardware. The company wants to make greater use of AI to improve how it serves content and ads to its users. "We expect these investments to provide us a technology advantage and unlock meaningful improvements across many of our key initiatives, including Feed, Reels and Ads," said CFO Dave Wehner during the third-quarter earnings call.

On top of buying expensive servers and networking equipment for its existing data centers, Meta is also expanding its data center footprint. The company believes this will give it greater flexibility, which is expected to generate cost savings over time.

Meta plans to spend between $32 billion and $33 billion on capital expenditures this year, ramping up to a range of $34 billion to $39 billion in 2023. Beyond next year, the company's spending will be guided by the return on these investments. For reference, the company spent just $19.2 billion on capex in 2021.

This investment cycle is different

This isn't Meta's first major investment cycle. The last one, in 2018-2019, saw capex as a percentage of revenue surge just like it's doing now.

 

Data source: Meta and Yahoo! Finance. Chart by author. Figures for 2022 and 2023 are based on the average of Meta's capex guidance and the average analyst estimate for revenue.

The difference this time is that Meta has stopped growing. The core advertising business is facing various headwinds, including privacy changes Apple made on iOS devices, a slowdown in advertiser demand, and the surging popularity of newer apps like TikTok.

Investing in AI should help Meta serve more relevant content and ads, which would make the company's apps more appealing for advertisers. But all the AI in the world isn't going to make Facebook popular with younger users again.

Meta's total revenue slumped 4% year over year in the third quarter. Ad impressions rose 17%, but the average price per ad tumbled 18%. Investing in AI to improve how much Meta can generate per ad impression makes sense, but the scale of these investments should be at least a little worrying for investors. Meta isn't investing to support its growth like the last time around, it's investing to restart it. That's a much riskier proposition.

To its credit, Meta is doing the opposite of what many companies would do in this situation. Instead of slashing costs to prop up the bottom line, Meta is plowing cash back into its business. The problem is that these investments don't address the core issues facing Meta's advertising business. What good are more relevant ads and content if people are increasingly turning to competing platforms like TikTok?

Despite Meta stock tumbling more than 70% from its peak and reaching a price-to-sales ratio below 2.5, it's a risky bet. Valuation doesn't matter when the future is clouded with uncertainty. To me, Meta seems like the most likely mega-cap tech company to not exist in a meaningful way 20 years down the road. I can't put odds on that, so I simply won't bother with the stock at all, no matter how cheap it looks. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Meta Is betting billions that AI will fix its advertising business appeared first on The Motley Fool Australia.

Meta Platforms' (NASDAQ: META) metaverse is going in reverse. The Facebook parent issued a stinker of an earnings report Wednesday, missing expectations on nearly every key metric and offering disappointing guidance.

Meta stock plunged on the third-quarter results, falling 20% in after-hours trading, and it's clear why. Overall, the results show a company whose once-dominant advertising business is fading, while it pursues what increasingly looks like a boondoggle in the metaverse. Revenue from Reality Labs, its metaverse-focused division, plunged in the quarter, and the company said losses in the segment would significantly widen next year. 

A reality check for Meta

Revenue from Reality Labs fell 51% to $285 million, which was the company's lowest revenue from the metaverse business in at least eight quarters. Reality Labs also reported an operating loss of $3.7 billion in the quarter, its biggest quarterly loss ever in the segment. Through the first three quarters of the year, the division has lost $9.4 billion.

At this stage, Reality Labs' revenue is made up entirely of Quest headset sales, and management said sales of Quest 2 were down from the quarter a year ago.

The company just began shipping its high-end mixed-reality headset, Quest Pro, which is priced at $1,500, and it plans to roll out the Quest 3 next year, which is expected to sell for between $300 and $500.

If you give Meta the benefit of the doubt, you might assume that the revenue decline in Reality Labs came because potential buyers were waiting for newer Quest models to come out, but the company's early forecast for 2023 wasn't inspiring either. Management anticipates that Reality Labs' operating loss will grow significantly in 2023, and didn't offer any indication it expected a substantial increase in revenue. 

It's hard to understate how colossal the metaverse division's losses are already, at an annual run rate of $15 billion after the third quarter. Only a few dozen U.S. businesses make that much in profit in a typical year, meaning almost no other company could afford to make a bet so expensive and risky.

The fact that Meta is willing to spend that much on an unproven concept might signal the company's confidence in the metaverse as the next major computing platform, as CEO Mark Zuckerberg has previously described it. However, that confidence could just as easily be misplaced, making Reality Labs a gargantuan folly that never becomes a viable business.

How to lose $500 billion in 10 months

Few companies, if any, have invested this much in a development-stage business before, and the bonfire in Reality Labs is one reason why Meta's stock is now down more than 60% this year, wiping off more than $500 billion from its market cap.

The other reason is the challenges in its advertising business, but Meta deserves a pass in that segment, as the two biggest headwinds there -- Apple's ad tracking transparency initiative and the macroeconomic slowdown -- are outside its control, and it has now lapped the worst of Apple's ad targeting restrictions.

The metaverse bet, on the other hand, Meta owns entirely, and the prospect of running an operating loss around $20 billion in Reality Labs next year is surely frightening to many of its investors. 

Management said that after 2023 it would manage its investments in Reality Labs to grow overall operating income, but that growth will come off of a much smaller base than the company had last year.

Advertising will remain the company's profit engine for the foreseeable future, but the stock's future will be determined by what the company achieves in the metaverse. If Reality Labs doesn't live up to Zuckerberg's ambitions, Meta's best days are likely behind it. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Meta just dropped a metaverse bomb on investors. Here's what you need to know appeared first on The Motley Fool Australia.

What happened

Shares of Meta Platforms (NASDAQ: META) were trading down 22% at 11:35 a.m. on Thursday after the company delivered third-quarter financial results. The social media giant beat the Street's revenue estimates but missed on earnings. 

Based on analysts' comments following the earnings report, the problem is not so much the weak numbers as management's plan to continue aggressively investing in growth initiatives, such as the metaverse, instead of firming up the bottom line.

So what

After posting a 1% year-over-year increase in revenue last quarter, Meta saw revenue decline 4% this quarter. Wall Street is looking at the slowing economy and advertising market, which is what social media companies use to make money, and not seeing much growth over the next year. That's why the stock is down 70% this year, in a nutshell.

The stock would probably be holding up much better if management were prioritizing profits over investments in artificial intelligence and the metaverse. But that's not the way CEO Mark Zuckerberg runs the company, and a long-term investor shouldn't want it any other way.

Instead of pulling back, the company said it would spend up to $33 billion in capital expenditures next year, which is roughly the same as previous guidance. Wall Street didn't want to hear that, especially after earnings per share (EPS) fell 49% year over year in the quarter.

Now what

On the earnings call, Zuckerberg mentioned that engagement trends have been positive across the family of apps, including Instagram and WhatsApp. He also noted the company can still "meaningfully" grow operating income over the long term, while still making investments in AI and Reality Labs (e.g., the metaverse and virtual reality).  

The stock was already cheap on a price-to-earnings basis going into earnings, and now it's 22% cheaper. What's certain is that with over 3 billion monthly active people across the family of apps, Meta is not a worthless company. Revenue growth will pick up in a healthier economy, when advertisers will feel more comfortable opening up their wallets.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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1) In early afternoon trade, the S&P/ASX 200 Index (ASX: XJO) is again in positive territory, up 0.6% to 6,848, its highest level in six long weeks.

Mining and energy stocks lead the way, as they have for so much of this year, with the BHP Group Ltd (ASX: BHP) share price up 2.1% to $39.35 and the Woodside Energy Ltd (ASX: WDS) share price up 2.5% to $35.78.

Whilst it has been a year to forget for tech stock investors, resources stocks have literally been money machines both from a share price appreciation perspective and their fully franked dividends.

If you believe commodity prices will stay higher for longer, the good times are likely to last, with Woodside shares trading on a forecast fully franked dividend yield of around 10%.

That said, commodity stocks have a long history of bust following the boom – despite its stellar run over the past 12 months, the BHP share price is barely higher than where it traded way back in October 2007. 

2) By contrast, the pain continues for tech stocks, with Facebook owner Meta Platforms (NASDAQ: META) shares plunging 20% in after hours trading after it "gave a forecast for revenue in the fourth quarter that was on the low end of analysts' estimates, showing the social-media platform continues to struggle with a weak advertising market amid an economic slowdown," according to Bloomberg. Excerpt:

"Meta is on shaky legs when it comes to the current state of its business," said Debra Aho Williamson, an analyst at Insider Intelligence. "Zuckerberg's decision to focus his company on the future promise of the metaverse took his attention away from the unfortunate realities of today: Meta is under incredible pressure from weakening worldwide economic conditions, challenges with Apple's App Tracking Transparency policy, and competition from other companies, including TikTok, for users and revenue."

The Meta share price was already down 55% year to date, with more pain to come. 

3) Despite the bear market for tech stocks showing no sign of ending, Bloomberg reports Morgan Stanley's Mike Wilson, a well-known stock market sceptic who correctly predicted this year's slump, as saying he believes the bear market in US equities may conclude sooner than investors think.

"We think ultimately the bear market will be over probably sometime in the first quarter," Wilson said in an interview on Bloomberg Television.

The same Bloomberg article says not all strategists are hopeful that US equities will bottom soon, with Goldman Sachs recently saying conditions for a trough aren't visible yet "as stocks don't fully reflect the latest rise in real yields and odds of a recession."

Earnings risk – as reflected by the big falls in Alphabet, Microsoft, Spotify and now Meta Platforms – is fast becoming the driver of stock market performance. 

4) With the RBA set to inflict yet more pain on mortgage-holders by raising interest rates on Melbourne Cup day, there's no doubt tougher days are ahead for Australian consumers.

Prior to this week's shock 32-year high inflation print, expectations were that the RBA would lift interest rates by 25 basis points, as they did at their October meeting.

Now at least two banks are saying the RBA will go back to supersized rate increases, with Westpac chief economist Bill Evans saying the central bank will raise by 50 basis points to 3.1%, and will keep going to 3.85%.

Investment bank Barrenjoey is also tipping the RBA will raise interest rates by basis points on Tuesday, lifting its terminal rate to 3.6%.

Such terminal rates would add at least one full percentage point to standard variable home loans, potentially putting them around 7.5% in the first quarter of 2023. 

5) Despite reporting a 5% increase in cash profit and a 3% increase in its final dividend to 72 cents, the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is on the nose Thursday, falling 3.3% to $24.99 in afternoon trading.

ANZ shares trade on a modest 11.5 times cash profits and a decent fully franked dividend yield of 5.7%. Still, analysts at Goldman Sachs aren't buying it, the investment bank currently having a neutral rating and $26.09 price target on the ANZ share price.

ANZ CEO Shayne Elliott says that aggregate household balance sheets, net of liquid assets, are the best they have been for 15 years. That said, he acknowledges there are tougher times ahead…

"… cost-of-living pressures are starting to have a meaningful impact and the next six months will be testing. This is particularly an issue for first-time homeowners who are only starting to build up their equity as well as those with less stable employment."

"There is uncertainty ahead, however we have the business in good shape to withstand volatility."

6) As AGM season continues, two recurring themes are emerging…

1. First quarter sales numbers are cycling a period when most of Australia was in lockdown, making year on year comparisons very difficult. Online sales are a long way off this time last year, whilst in-store sales are obviously way higher.
   
2. Retailers are almost universal in cautioning that tougher times are ahead… 

"… an uncertain retail environment and with household budgets under increasing pressure…"  – JB Hi-Fi Limited (ASX: JBH)

"While current trading remains strong, the Group expects higher mortgage rates and

increased cost of living expenses will begin to impact consumer spending." – Super Retail Group Ltd (ASX: SUL)

The JB Hi-Fi share price is largely flat today. At around $43, its shares trade on a cheap looking 9 times earnings and a trailing fully franked dividend yield of over 7%. 

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What happened

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), the world leader in online advertising, released its third-quarter financial report after the market closed Tuesday, and the results were disappointing. Furthermore, these results were seen as a harbinger of what's to come for the rest of the digital advertising industry.

As a result, many adtech and digital advertising stocks fell in sympathy on Wednesday, as investors considered what was to come. Shares of The Trade Desk (NASDAQ: TTD) and Meta Platforms (NASDAQ: META) slumped as much as 8.1% and 5.5%, respectively, while Amazon (NASDAQ: AMZN) and Roku (NASDAQ: ROKU) had fallen as much as 4.8% and 3.9% respectively. As of 1:59 p.m. ET, the quartet was down 3.9%, 5.1%, 3.9%, and 2.9%, respectively.

This sell-off was broad based, taking down a wide variety of companies that rely on digital advertising for their livelihood. Earlier this year, Google's ad revenue seemed largely immune to the recessionary fears that gripped much of Wall Street. It's well documented that advertising is among the first items in corporate budgets to be slashed in times of economic uncertainty, and it seems that reality has finally caught up with the digital advertising kingpin.

So what

In the third quarter, Alphabet reported revenue of $69.1 billion, which grew just 6% year over year. Foreign currency headwinds played a part, as revenue would have been up 11% in constant currency. For context, revenue in the prior-year quarter grew by 41%.

The pressure on the top line also dented profits, as earnings per share (EPS) of $1.06 declined 24%. Analysts' consensus estimates had called for revenue of $71 billion and EPS of $1.26, so Alphabet failed to clear either bar.      

However, commentary by the company sent investors running for the exits, as management detailed several factors that will weigh on results for the coming quarter. Alphabet cited tough comps, worsening foreign exchange headwinds, and lower ad spending as companies shore up their financial positions in the face of growing economic uncertainty.

As a result of the disappointing results, analysts issued a flurry of price target reductions, with no fewer than 14 of Wall Street's finest cutting their expectations. JMP Securities analyst Andrew Boone seemed to capture the prevailing mood, saying the results were a warning sign that digital advertising this quarter will likely be weaker than originally imagined. 

Bernstein analyst Mark Shmulik echoed those sentiments, writing, "Google is an ad business first, and digital ads [are] no longer a safe place to hide."  

Now what

Alphabet's results seemed to suggest the writing is on the wall for the rest of the digital advertising and adtech space. That said, investors shouldn't be too quick to jump ship but rather assess the potential for each of these companies on their own merit.

Meta Platforms leads the social media space and is widely regarded as the other company in the Google/Facebook duopoly that dominates much of the digital advertising space. Given the similarities in their business models and Meta's reliance on digital advertising for more than 97% of its revenue and all of its profits, the comparison is an appropriate one. After that, however, the contrasts become more pronounced.

Amazon derives the lion's share of its revenue from e-commerce and cloud computing, though in recent years, digital advertising has been one of the company's fastest-growing businesses. Amazon's advertising services revenue grew 20% so far this year but still represents just 7% of the company's total revenue, so the sell-off in this case is likely related to the state of the broader economy and the potential to slow growth in its e-commerce and cloud segments.

Roku is an interesting one. Investors inexorably link the company with its namesake streaming devices, but many are unaware that Roku derives the majority of its revenue from the digital advertising that appears on its streaming video platform. Alphabet said that digital ads on YouTube, the company's streaming platform, declined 2% year over year, the first such decline since Alphabet began reporting the platform's results in 2019. This could spell trouble for Roku in the coming quarters.  

Finally, there's The Trade Desk. The company's adtech platform places digital ads across a wide spectrum of online locations, acting as a go-between for some of the world's largest ad agencies.

When The Trade Desk released its second-quarter report in early August, the results were surprisingly robust. Revenue grew 35% year over year, while adjusted EPS climbed 11%. At the time, CEO Jeff Green made a startling pronouncement, saying (emphasis mine), "This trend also gives us confidence that we will continue to gain market share in any market environment."  

The Trade Desk is seen as a striking alternative to advertising in the walled gardens offered by Google, Facebook, and Amazon. It also has one of the highest valuations, a function of its consistently strong results and entrenched position in the industry. While the stock may yet feel the impact of the economic downturn, The Trade Desk is still my top pick among these digital advertising and adtech stocks. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Like many growth-focused funds, it's been a very tough 12 months for the Hyperion Global Growth Companies Fund (ASX: HYGG).

The fund consists of "a high-conviction portfolio of quality global listed equities from a research driven, bottom-up investment philosophy". It's looking for companies that have predictable earnings, low debt, sustainable competitive advantages, organic growth options and experienced and proven management teams. 

The September 2022 monthly update shows the fund has declined 31.8% over the past 12 months. The biggest detractors to performance were some of the largest and most popular global tech stocks.

Even for those of us who are somewhat numb to just how far these fallen heroes have tumbled, when the numbers are laid bare, you see just how brutal this market has been for a number of large-cap tech stocks.

Block (NYSE: SQ) – down 74%

Roku (NASDAQ: ROKU) – down 80%

Spotify (NYSE: SPOT) – down 57%

Meta Platforms (NASDAQ: META) – down 55%

How the mighty have fallen. 

Yet Hyperion are sticking to their guns, confident in what they believe will be a low-growth inflationary environment, that such an environment is best for their investing style.

Hyperion says that while short-term performance has been unpredictable, and acknowledging it has been a difficult period for investors, the fund believes it has allocated capital to businesses that will produce superior long-term results. 

The top five holdings at the end of September were all large-cap US tech stocks, namely Tesla (NASDAQ: TSLA), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), ServiceNow (NYSE: NOW) and Airbnb (NASDAQ: ABNB). Combined, they made up over half the Hyperion Global Growth Companies Fund portfolio.

Hyperion went on to say its "global portfolio continues to produce strong short-term financial results which are consistent with the assumptions that underpin our long-term valuations," saying it believes its portfolio "should perform relatively well in an economic downturn".

The Hyperion Global Growth Companies Fund share price has fallen 31.7% over the past 12 months, in line with the underlying performance of the fund.

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As of June 2022, Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK.A)(NYSE: BRK.B) portfolio controls 10.67 million shares of Amazon.com,Inc. (NASDAQ: AMZN) -- a position worth $1.29 billion. Buffett has long been a fan of the company, praising its management skill and dominance of the e-commerce and cloud computing industries.

Let's explore why it could also make a top investment for your portfolio. 

An undeniably quality business 

Warren Buffett's investment strategy focuses on quality businesses instead of struggling "cigar butts" that are past their prime. With unquestionable dominance of U.S. e-commerce and global cloud computing (boasting market shares of 38% and 34%, respectively), Amazon is as quality as they come. And despite near-term challenges, the company's long-term trajectory remains intact. 

Second-quarter results were a mixed bag. Net sales grew 7% to $121.2 billion. But challenges like inflation and the end of the COVID-19-related online shopping boom put pressure on the company's margins leading to a net loss of $2 billion, down from a net profit of $7.8 billion in the prior-year period. That said, both headwinds look likely to normalize over the long term (for example, the Federal Reserve is raising rates to tame inflation) and are related to macroeconomic challenges, not company-specific failures. 

Amazon has plenty of options to drive continued growth. According to Insider, it plans to roll out its online marketplace in five new countries, mainly in Africa and Latin America, next year. Cloud computing is also an exciting opportunity. Management believes the economy is at the early stages of cloud adoption, leaving plenty of room for expansion as Amazon Web Services (AWS) leverages its economic moat in the industry. 

A rock-solid economic moat 

What exactly is an "economic moat"? Coined by Warren Buffett, the term refers to a company's ability to sustain a long-term competitive advantage over rivals. For Amazon's e-commerce operations, this largely comes down to its scale and network effects. Because more consumers buy on Amazon, more merchants sell on Amazon -- leading to more competition and product variety, which becomes a positive feedback loop. Scale also benefits Amazon's cloud business, AWS, in terms of brand recognition and high switching costs for clients who might consider its competitors.

Over the long term, Amazon is likely to use its natural advantage to expand into new synergistic industries like advertising. According to Insider, Amazon is now the third-biggest digital advertising company in the world -- behind Google and Facebook -- generating $31 billion in 2021. The company's massive user base of shopping-motivated customers gives it a natural advantage in this competitive industry. 

Be greedy when others are fearful

With the S&P 500 down 21% year to date, we are now in a bear market. And the Fed's rate hikes and other tightening policies could make the downside worse before it gets better. That said, bear markets are a great time to bet on quality companies trading at a discount to their historic highs. And Amazon's resilient operations and rock-solid economic moat could make it a great way to bet on a rebound. It isn't hard to see why Buffett backs the company. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Meta Platforms (NASDAQ: META), formerly Facebook, has been frustrated for the last 15 years by having to play by Apple's and Alphabet's rules on iOS and Android.

Meta's first attempt to circumvent the duo's smartphone dominance, the Facebook phone, ended as a dismal failure in 2013. But the company's second bite at the apple has a much better chance of working.

Here is how Meta Platforms plans to disrupt the two smartphone empires.

Love at first sight

Meta founder Mark Zuckerberg first formed the seed of a plan to topple the iOS and Android empires after Google co-founder Sergey Brin introduced him to a Google Glass prototype on the sidelines of an awards ceremony. The Glass project was Google's first attempt at augmented reality (AR), a technology that superimposes computer-generated visual content on a user's view of the real world via a set of glasses. And Zuckerberg's first look at Glass was love at first sight.

Once Zuckerberg got a pair and took a closer look at what the technology could do, it wasn't long before he visualized his company creating its own smart glasses hardware platform, where it would be free from following other companies' rules. 

The platform of tomorrow

Facebook missed the birth of the mobile phone era. But once it was clear that the world was near the dawn of new computing technology, Zuckerberg began making aggressive bets. 

His first bet was the acquisition of Oculus in 2014 for $2 billion. It was a promising small company developing virtual reality (VR), an interactive computer-generated simulation of a three-dimensional environment. When the company first announced the Oculus acquisition, Zuckerberg was quick to say that mobile is today's platform, but the company was getting ready for the platforms of tomorrow.  

Meta is relatively early in its VR opportunity, with massive growth ahead. Fortune Business Insights projects the global VR market to grow from $16.67 billion in 2022 to $227.34 billion by 2029, a compound annual growth rate of 45.2%.

Zuckerberg has an AR vision, too

While VR should grow into a massive market over the next decade, Apple CEO Tim Cook said in a 2016 interview with ABC News that he favors AR over VR and believes AR will eventually be the larger of the two.

You might then wonder why Zuckerberg did not pursue AR first. The answer is that VR technology was much further ahead than AR toward becoming a viable consumer product in 2014.  

But in 2022, industry analysts believe the AR market is geared to take off. Market research company Insider Intelligence projects that this country's AR market will grow to 89.4 million users by the end of 2022 and reach 100 million users in 2025 -- 35.5% of all U.S. internet users.

And at the World Economic Forum earlier this year, CNBC reported that Nokia CEO Pekka Lundmark believes that smart glasses will replace smartphones by 2030, a growing belief among some tech executives. Should that occur, it could potentially end the iOS and Android chokehold on wireless mobile technology, a desirable scenario for Meta.

Consequently, Zuckerberg's second bet is heavy investment in AR. Meta's division that develops AR and VR products, Reality Labs, began introducing AR products in 2021. It started with Ray-Ban Stories, a limited-feature smart glass produced in collaboration with the EssilorLuxottica brand Ray-Ban. Users can take pictures and videos, listen to music, and take phone calls with these glasses.

Its full-featured AR is named Project Nazare, which will likely take many years to develop into a finished product. According to tech news website The Information, Meta wanted to release its first consumer version of Nazare in 2024. But it has since scrapped those plans, likely because of the souring global economy. 

A cloudy short-term picture

In May, Reuters reported that Meta's chief technology officer Andrew Bosworth told Reality Labs employees that it would not be able to afford some projects and that the company could postpone other projects. And things have only gotten worse since May.

Meta's second-quarter total revenue declined 1% year over year due to unfavorable foreign exchange rates, the war in Ukraine, Apple's iOS changes, weakness in e-commerce, and a sour economy. And Reality Labs had an operating loss of $2.8 billion in the quarter. Should the economy worsen, management could decide on further cutbacks. So there are reasons to avoid Meta's stock, which include rumors that Apple will start releasing its AR/VR products in 2023, potentially jumping ahead of Meta.

However, Meta's shares now trade at a trailing price-to-earnings (P/E) ratio of 11.6, close to a historic low -- compensating investors for taking some risk. So if you are a long-term investor who believes in Zuckerberg's vision, now might be a great time to grab a few shares. If the company successfully creates a smart-glass platform, today's valuation could look low 10 years from now.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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