Mad Hedge Technology Alerts!
It’s clear that the cost of gaining each incremental load of revenue is a lot harder than it used to be for Meta (META) platforms.
This is why expenses have exploded out of control, but I wouldn’t say that it’s time to take profits because they benefit from the “too big to fail” mantra just like other systemically important stocks.
I don’t believe they will rekindle sales growth of yore because there isn’t anything on the horizon that strikes me as something that would be a game changer.
The metaverse which they are sinking a fortune into has turned into a black hole of capital.
CEO Mark Zuckerberg himself couldn’t explain on the conference call when there would be tangible results that would deliver help to the bottom line.
That means open-ended funding to R&D and that is not what you want to hear from shareholders.
The pay-as-you-go elements to this don’t bode well, because they still don’t understand how they can monetize AI.
The silver lining here is that Meta is still quite profitable.
The top line of $28.6 billion was up 3% year over year.
It was the first year-over-year revenue growth Meta has been able to muster since the first quarter of last year. Per-share earnings of $2.20 also topped the consensus of $2.02.
Sales guidance for the quarter currently underway was also better than expected, with the company forecasting a top line of somewhere between $29.5 billion and $32 billion.
Q1's net income of $5.7 billion is 24% less than the bottom line from the first quarter of 2022 showing that even though they make a lot of money, profitability is slowing.
While Meta did sequentially add 60 million daily users to its services last quarter, most of that growth came from the Asia-Pacific market or the "rest of the world" - not Europe, Canada, or the U.S.
Those two markets experience the lowest ARPU (average revenue per user) figures among all the ones Meta serves.
And in both of those cases, ARPU figures have been essentially stagnant since the second quarter of last year.
It’s increasingly worrisome that the growth part of META is low quality.
Zuckerberg knows that it’s a fight to the bottom with his existing business which is why he is hell-bent on making the metaverse work.
Don’t forget that META shares fell from $360 per share last year and many investors can describe the recent price action as a reversion to the mean.
Expect higher costs to eat into META’s bottom line, but not so damaging that it will kill the business model.
The gains are there to be had, but don’t expect any high growth to come from META – those days are essentially over.
META will most likely grind higher and I do believe investors should buy the dip when available.
When the trend isn’t broken, then don’t fight against it.
Don’t forget they will benefit from another tailwind of end of 2023 rate cuts.
Tech business models aren’t as good as they used to be, but that doesn’t mean these stocks won’t go up.
A tepid META receiving investor love also shows how bad things are at the bottom of the barrel from SPACS to lockdown darlings.
Small growth stocks have little to no chance to compete moving forward so investors should only focus on “too big to fail” tech stocks in a world of higher rates.
Mad Hedge Technology Letter
April 28, 2023
Fiat Lux
Featured Trade:
(BUY AMAZON ON THE DIP)
(AMZN), (AAPL)
The one sound bite that really jumped out at me on Amazon’s earnings calls that sums up the zeitgeist right now in the tech sector is when CEO Andy Jassy said “customers are looking for ways to save money however they can right now.”
Savings money is foreign to growth tech, but investors should get used to the new Silicon Valley.
When the success of a tech firm is utterly reliant on mass volume of sales, this isn’t the type of trend that will drive earnings higher in the future.
I am not blaming Amazon for customers pinching pennies.
It has more to do with the generally macro malaise that US consumers are facing with the explosive price rises of the last few years.
There is no point to rehash about inflation, but the net effect is that there is less opportunity for these ecommerce companies to flog products.
The US consumer is even more reliant on debt to finance purchases than before and smart companies like Apple (APPL) have rolled out savings accounts because they are aware that the fight for deposits is up for grabs after the banking contagion.
Even though AMZN delivered us a great quarter in terms of profitability and top line growth, the larger takeaway was the uncertain path going forward.
Amazon CFO Brian Olsavsky told investors on the company's earnings call AWS customers are continuing "optimizations" in their spending.
The CFO described the first quarter as “tough economic conditions.
Revenue in Amazon's AWS unit grew 16% during the first quarter, down from an annual growth rate of 37% seen in the same quarter last year.
Disclosure that sales growth at AWS had slowed further in April sets the stage for AWS’s weakest growth rate since Amazon began breaking out the unit’s sales.
Amazon’s advertising business continues to deliver robust growth, largely due to ongoing machine learning investments that help customers see relevant information when they engage.
US customers are moderating spending on discretionary categories as well as shifts to lower-priced items and healthy demand in everyday essentials, such as consumables and beauty.
A little bit of a mixed bag, but disappointing guidance in AWS really sticks out like a sore thumb.
As we exit the bulk of big tech earnings, it is clear there is quite a bit of runway left for big tech shares to go higher.
I can’t say the same for every tech stock, because growth stocks have a different set of challenges that they haven’t been able to overcome.
Amazon still posted great earnings and investors should absolutely look to buy shares on the dip.
Even at less than 100%, AMZN is still worth owning over a lot of SPACs, growth tech, or emerging tech.
What we are seeing now are these behemoth tech companies leveraging their balance sheet in an interest rate matters world which is why small companies can’t compete anymore.
Although not technically monopolies, some of these tech firms are getting darn close with their closed “ecosystems.”
Buy AMZN on the next dip.
