Investing in top class businesses has been a proven approach in uncertain economic times. As we look for high quality opportunities for the next few years, the answer could be in the big-tech winners from prior years like Meta.
Big-tech giants leading the charge in 2023
Following a tough year for financial markets in 2022, the start of 2023 has shown more promise, with the S&P 500 index up 6% in January.
The technology-heavy Nasdaq index performed even better, up 11% in January. Some of this can be attributed to a return of animal spirits where higher risk, lower quality investments are moving sharply higher again. Bitcoin has risen nearly 50% in the year-to-date and old meme stocks like AMC cinema are up 30%.
But some of the biggest returns came from the large-tech companies.
For years, the likes of Google, Amazon, Netflix and Meta (formerly known as Facebook) dominated their respective industries. Their wide moats or competitive advantages kept competitors at bay and their fast-growing revenues driven by secular tailwinds and high profitability generated strong returns for shareholders.
In 2022, these names became pariahs. The big-tech giants shed a combined market value of around $2.5 trillion in 2022 as sentiment soured on these companies.
Like many businesses, they had benefited from a pull-forward of demand during the pandemic (as we watched more online videos and shopped online during lockdowns). These companies saw this abnormally strong demand and loaded costs and investment into their businesses to both service the demand and drive future growth. Headcount in these companies increased rapidly – Meta added around 40,000 employees between 2019 and 2022 and Amazon doubled its headcount over the same period, adding 800,000 people – roughly the population of Wellington and Christchurch combined.
As this COVID demand receded in 2022, these companies were left with slowing revenues but ramping costs, squeezing their profit margins. Investors even began questioning the moats around these businesses, hurting sentiment further.
In recent months, these companies have focused on operating more efficiently, reducing headcount and rationalising spend. While we never want to see anyone lose their job, some of the excess spending that had crept in during the good times was now being cut – with the management teams instead focusing on their core businesses and strategic initiatives. This has seen sentiment improve, but their share prices remain well below prior levels.
With its share price up over 40% year-to-date, Meta is the poster child for the resurgence in big-tech.
Meta - reports of its death are greatly exaggerated (again)
Meta’s stock price fell in 2022, alongside other big-tech. Investors began questioning the viability of Facebook and Instagram in the face of slowing revenue growth and increasing competition from new entrants like TikTok. Some commentators were predicting the impending death of the world’s largest social media platform. The announcement of billions of dollars of investment into the ‘Metaverse’ further supported the theory that Meta was worried about declines in the core business.
This is not new. A quick online search shows news articles from as far back as 2013 questioning whether Facebook would survive. Since that time, Meta has grown revenue nearly 15x and profits 17x.
Social media is constantly evolving: shifting from PC to mobile, from text to images and now short videos. Meta has been adept at evolving its own business to meet these changes in how we consume social media – maintaining its leading position.
Recent earnings reports from competitors show that the slowing growth is an industry-wide phenomenon, driven by a combination of an unwinding of the COVID pull-forward demand and a cyclical slow-down as advertisers reduce spend in an uncertain economic environment. This should improve as the economy recovers.
Meta’s user growth and time spent per user – perhaps the most important metrics for a social media platform – continue to move in the right direction. Global user numbers are growing, even in the more mature North American market. Meta now has nearly 4 billion people using at least one of the company’s core products - Facebook, Messenger, Instagram and WhatsApp.
Conversely, data suggests that TikTok’s US user growth and time spent on the app has flatlined or even declined. Meta’s competing short video product ‘Reels’ was launched in 2021 and is rapidly gaining uptake, growing the overall time spent on Meta’s apps. Once again Meta has proven its ability to adapt.
Like other big-tech companies, Meta has also got the message on costs. CEO Mark Zuckerberg has declared 2023 to be the “year of efficiency”. Meta has made the difficult decision to reduce headcount by 11,000 with more to come. Most importantly, the company is not losing focus on the core business. While the company is spending less overall, it is increasing investment into what it sees as core long-term strategic initiatives, including artificial intelligence and the Metaverse.
Meet the new boss, same as the old boss
As the economy improves and advertising spend returns, we see Meta as a key beneficiary.
There is still plenty of runway for legacy advertising spend to shift online. And with four billion users, Meta is a must-have platform for advertisers.
Meta’s new Reels product has driven increasing user engagement and time spent, and as engagement goes so should advertising dollars. With billions of users, WhatsApp and Facebook Messenger are still under-monetised and ripe for growth.
And with a renewed focus on efficiency and a streamlined cost base – Meta should return to the high levels of profitability and cashflow generation of old.
