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Meta ‘is going through a wrenching business model change,’ analyst says

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

Video Transcript

AKIKO FUJITA: Upcoming measures, including layoffs, hammering the tech sector. But a spate of recent better than expected earnings might mean the bottom is closer than the Street thinks. Joining us with more is Paul Meeks, Independent Solutions Wealth Management portfolio manager. Paul, it sounds like you're warming up to tech, but you're not quite all in yet.

PAUL MEEKS: That's absolutely correct. You know, I don't think there's a material change to the good in these companies' fundamentals. We saw that echoed in the June quarter results and guidance for the September quarter and beyond.

But here's the rub. It's not what a company does on the top or bottom line. It's what it does versus expectations. And I think that a few tech companies that still have good long-term prospects have taken numbers down so much. And they finally are recognizing a recessionary impact on their business that they might be able to start to heal. And that's what I'm looking for.

AKIKO FUJITA: What company specifically are you eyeing on that front?

PAUL MEEKS: So among the majors, I take a look at the FAANGs. Everybody always wants to ask me about the FAANGs. I think that Amazon, Microsoft, Alphabet have shown some nice resiliency, maybe even Microsoft. I'm still in a cloud and staying away for defensive purposes Netflix and Meta.

AKIKO FUJITA: Let's talk about Meta specifically. I mean, we have seen a lot of these social media stocks get hit hard. Obviously, with Meta, I mean, you could argue that compared to the other big FAANG names, they're not as diversified in terms of where their revenue is coming in from. I mean, when you think about the outlook specifically on advertising, how gloomy does that look for you?

PAUL MEEKS: It does look gloomy. And I think a lot of it at this point might be baked into the stock price. I mean, it's been a horrid performer. But what worries me about Meta the most is not that there's not going to be a rebound in digital advertising. There clearly will be at some point, as long as the recessionary is not deep or long, which I don't think it will be.

But here is a company that is going through a wrenching business model change. And I don't know what it looks like as far as top line and bottom line growth afterwards. So I need to stay away until I can at least guesstimate what this company will be and look like.

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

PAUL MEEKS: Yeah, there is. I don't know how much further the numbers will be cut. But I think they could be cut. And regardless of how cheap a stock looks either absolutely or relative to its peers, it cannot, as I like to say, heal. It cannot consistently outperform until we have the last estimate revision downward. And I think that we might have a few more quarters in front of us for Meta as they go through this business change that I've mentioned. And I think we might be getting close to the trough of some of the other FAANGs. And so that's why I prefer them.

AKIKO FUJITA: You mentioned Netflix is another one that you're watching cautiously. When you look at the most recent quarter, I mean, I guess, the sentiment around that was, it wasn't as bad as we thought. So this is kind of an expectations game. Things were so bad in the previous quarter with the declines in subs that, now, investors are kind of looking at the stock to say, well, maybe, is this a good time to go in?

There's a number of levers that can still be pulled here on the revenue side-- their ad model, obviously, limiting password sharing as well. I mean, are those things that-- what would you need to see from the company in order to change how you view the stock?

PAUL MEEKS: I'm feeling a little bit better about Netflix as per Meta. But I feel better still with the other FAANGs. At least with Netflix, we know that their business model will be similar, whereas Meta, they're going from black to white because, yes, they can pull some levers, right? Stop the cheating on all the password sharing. And also, we all know that in early next year, already been announced, already been announced with a marquee partner that they're going to add a lower cost ad-supported tier. So at least, they're not going from video streaming to making automobiles.

The problem with Meta, they're going from one business to potentially a really different business. So Netflix-- and you saw with the less bad net subscriber losses in the last quarter that had actually rallied nicely because maybe we, with that stock, are putting in the bottom. But there'll be some interesting things that the company has to do over the course of the rest of '22 and '23 to get its mojo back.

AKIKO FUJITA: Yeah, investors are going to be certainly scrutinizing every one of the numbers that come out. Paul Meeks, always good to have you on the show, Independent Solutions Wealth Management portfolio manager.