Why Meta is a social media stock to like, plus is an earnings tech rally on the horizon?

Opening Bid - January 19, 2024: Tech Momentum, Earnings, and Social Media Analysis

Key Concepts:

• AI Boom: Significant and rapidly growing demand for Artificial Intelligence technologies, driving growth in related sectors.
• Mag 7: Refers to the seven largest US technology companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta).
• Capex: Capital Expenditure – funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• EPS: Earnings Per Share – a company's profit allocated to each outstanding share of common stock.
• Semiconductor Stocks (SOX Index): An index tracking the performance of semiconductor companies.
• Insider Buying: Purchase of a company’s stock by its officers, directors, or large shareholders, often seen as a positive signal.
• Free Cash Flow: A measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures.

I. Tech Sector Momentum & TSMC Earnings

The broadcast opened with a discussion of a positive momentum swing in the tech sector, observed through increased activity in stocks like Nvidia, Micron, Tesla, AMD, TSMC, Intel, and Microsoft. This surge is attributed to two primary factors.

Firstly, TSMC’s recent earnings report was described as “extraordinary,” with projected sales growth of 30% for the year, potentially conservative given the strength of the AI boom. This report signals continued strong demand for AI-related technologies, challenging bearish perspectives. Brian Sazy referenced a conversation with Crowdstrike CEO George Kurtz, who emphasized the necessity of secure AI implementation and predicted an “explosion of security” to protect AI use cases. Kurtz’s investment in the Mercedes F1 team was noted as a demonstration of his financial confidence.

Secondly, the tech sector started the year relatively underperforming, potentially attracting “dip buyers” ahead of earnings season. The expectation is that tech earnings will significantly outperform the broader S&P 500, with projected EPS growth of 21% in Q4 compared to 3% for the S&P 500.

II. Mag 7 Performance & Valuation Discussion

Despite the overall positive outlook, the performance of individual “Mag 7” stocks is mixed. Nvidia is up only 1% year-to-date, while the semiconductor index (SOX) is up 9%. Meta is down 5%. However, the panel argued that a renewed rally could begin with these stocks.

Eric Lynch, Managing Director at Sun Coast Equity, noted that 80% of S&P 500 earnings growth in Q4 is expected to come from the IT sector, consistent with recent years. He highlighted concerns about increasing capital expenditure (Capex) guidance from these companies, which is contributing to stock price pressure. However, he pointed out that valuations are becoming attractive: Nvidia trades at 25x forward earnings, while Meta is at 19-20x, comparable to or lower than the S&P 500 despite significantly higher growth rates. He suggested this presents a compelling risk-reward opportunity.

III. NASDAQ Performance & Specific Stock Analysis

Brooke Depal reported that the NASDAQ is showing signs of recovery, with most stocks trading in the green, led by Micron (up nearly 7%). However, software stocks remain weak. Year-to-date performance is mixed, with Apple, Microsoft, and Meta down around 5%, while Google is up over 6% due to the positive reception of its Gemini product.

Specific stocks discussed included:

• Micron: Highlighted for its year-to-date gains and a recent director purchase of 23,000 shares, with a street price target around $340.
• ASML: Noted for double-digit percentage gains in the first two weeks of the year.
• Nvidia: Despite its relatively modest year-to-date gains, it remains a favored pick due to its high growth rate (60-70% revenue and EPS growth).
• Meta: Considered attractive at 20x forward earnings, particularly given its successful application of AI to advertising.

IV. Social Media Sector Analysis

The discussion shifted to the social media sector, noting a stark divergence in performance.

• Reddit: Stock was down almost 10% due to weakness in ad spending from small and medium-sized businesses.
• Meta: Down 5% year-to-date due to investor concerns about potential increases in capital expenditure related to AI investments.
• Pinterest: Experiencing some recovery after a sell-off in November, with some investors believing the decline was overdone.

Eric Lynch reiterated his preference for Meta, citing its 26% revenue growth and ability to scale AI across its platforms. He noted that Meta has a history of reining in spending when faced with market pushback. Brooke Depal highlighted the importance of YouTube as a platform for content creators and the potential of Reddit, noting that it is cited in 40% of AI-generated responses, indicating its value as a data source.

V. Broader Economic Considerations & Walmart Leadership Change

The conversation touched on broader economic factors, including commodity prices (precious metals and oil) and their potential impact on company earnings. The recent leadership change at Walmart was also discussed. Kath McLay’s departure as CEO of Walmart International and the appointment of the former Sam’s Club CEO were noted. Brooke Depal emphasized McLay’s strong performance and expressed confidence in her future endeavors. The broader trend of CEO changes within the retail sector was highlighted.

VI. Netflix Earnings Preview

The segment concluded with a preview of Netflix’s upcoming earnings report on January 20th. Concerns were raised about potential guidance for 2026 profits falling below consensus estimates, reflecting uncertainty surrounding the cost of the Warner Brothers acquisition and difficult financial comparisons. Despite strong content performance (Stranger Things, Squid Games), investors are wary of the $72 billion bid for Warner Brothers. The stock is down 30% in the past six months, with most of the decline occurring since the bid announcement.

Notable Quotes:

• George Kurtz (Crowdstrike CEO): “AI and AI agents are going to change the world. There's no doubt about that. But that has to be done in a secure way that minimizes risk to the business and provides a level of compliance.”
• Eric Lynch (Sun Coast Equity): “The Mag 7 have become the lag seven.”
• Brooke Depal (Yahoo Finance Reporter): “Now I'm not saying go out and buy these stocks, but now could be the time where you back up that truck and you reassess some of these names.”

Conclusion:

The broadcast presented a cautiously optimistic outlook for the tech sector, driven by the ongoing AI boom and potentially attractive valuations. While individual stock performance is mixed, the panel identified opportunities in companies like Nvidia and Meta. The discussion highlighted the importance of monitoring capital expenditure guidance, broader economic trends, and upcoming earnings reports. The analysis of the social media sector revealed a more fragmented picture, with varying performance and distinct investment considerations. Overall, the message was one of reassessment and potential opportunity in a dynamic market environment.