Business model

Meta ‘is experiencing heartbreaking business model shift’, analyst says

Independent Solutions Wealth Management portfolio manager Paul Meeks discusses tech stocks that are poised to rebound, like Amazon, Microsoft and Alphabet, as well as the outlook for other names like Meta and Netflix.

Video transcript

AKIKO FUJITA: Upcoming measures, including layoffs, are hammering the tech sector. But a flurry of better-than-expected recent earnings could mean the bottom is closer than the street thinks. Paul Meeks, Independent Solutions Wealth Management Portfolio Manager, joins us along with others. Paul, it sounds like you’re getting to grips with the technology, but you’re not quite on board yet.

PAUL MEEK: That’s absolutely correct. You know, I don’t think there’s a significant change in the fundamentals of these companies though. We saw this reflected in the June quarter results and guidance for the September quarter and beyond.

But here’s the catch. It’s not what a company does in terms of revenue or bottom line. This is what it does relative to expectations. And I think a few tech companies that still have good long-term prospects have dropped their numbers so much. And they are finally acknowledging an impact of the recession on their business that maybe they could start to heal. And that’s what I’m looking for.

AKIKO FUJITA: Which company are you considering specifically on this front?

PAUL MEEK: So among the majors, I take a look at the FAANGs. Everyone always wants to ask me about FAANG. I think Amazon, Microsoft, Alphabet have shown great resilience, maybe even Microsoft. I’m still in a cloud and staying away for Netflix and Meta defensive purposes.

AKIKO FUJITA: Let’s talk about Meta specifically. I mean, we’ve seen a lot of these social media stocks take a big hit. Obviously, with Meta, I mean, you could say that compared to the other big names in FAANG, they’re not as diverse in terms of where their income comes from. I mean, when you think about the outlook specifically on advertising, how bleak does that sound to you?

PAUL MEEK: It looks dark. And I think a lot of it at this point could be priced in. I mean, it’s been a horrible performer. But what worries me most about Meta isn’t that there won’t be a digital advertising rebound. Clearly there will be at some point, until the recession is deep or long, which I don’t think.

But here’s a company going through a harrowing business model shift. And I don’t know what that looks like in terms of revenue and bottom line growth after that. So I have to stay away until I can at least guess what this company will look like.

AKIKO FUJITA: Yeah, I mean, how much downside do you see as he tries to shake things up? I mean, it seems to go deeper than the kind of macro headwinds we’re talking about right now, if it’s about the company trying to find a new identity beyond social media.

PAUL MEEK: Yes there is. I don’t know how low the numbers will be. But I think they could be cut. And no matter how cheap a stock looks, either in absolute terms or relative to its peers, it can’t, as I like to say, heal. It cannot consistently outperform until we have the latest downgrade. And I think we could have a few more quarters ahead of us for Meta as they go through this business shift that I mentioned. And I think we’re getting closer to the bottom of some of the other FAANGs. And that’s why I prefer them.

AKIKO FUJITA: You mentioned that Netflix is ​​another one you watch with caution. When you look at the most recent quarter, I mean, I guess the sentiment around that wasn’t as bad as we thought. So it’s kind of a waiting game. Things were so bad in the previous quarter with the subs going down that now investors are kind of looking at the stock to say, well, maybe this is a good time to get in there ?

There are a number of levers that can still be pulled here on the revenue side – their advertising model, obviously, also limiting password sharing. I mean, are these things — what would you need to see from the company to change the way you view stocks?

PAUL MEEK: I feel a little better about Netflix according to Meta. But I feel even better with the other FAANGs. At least with Netflix, we know that their business model will be similar, whereas Meta, they go from black to white because, yes, they can pull levers, right? Stop cheating on all password sharing. And also, we all know that early next year, already announced, already announced with a brand partner that they’re going to add an ad-supported tier at a lower cost. So at least they won’t switch from streaming video to manufacturing automobiles.

The problem with Meta is that they go from one company to a potentially very different company. So Netflix – and you saw with the not so bad net subscriber losses last quarter that had actually turned around quite nicely because maybe we, with this stock, are putting on the bottom. But there will be some interesting things the company will have to do over the rest of 22 and 23 to get its mojo back.

AKIKO FUJITA: Yes, investors will certainly examine each of the numbers that come out. Paul Meeks, always great to have you on the show, Independent Solutions Wealth Management portfolio manager.