The Magnificent 7 tech stocks, which led the stock market surge in 2023, are facing scrutiny this year as some encounter obstacles. While their performance outpaced the NASDAQ’s growth last year, several of these tech giants seem to have reached their peak. However, this doesn’t signify the end of their potential. Rather, it underscores the importance of cautious investing and thorough research. These companies possess formidable advantages, including dominant market positions, robust financial reserves, and outstanding product offerings, all of which propelled them to the forefront. While some may be experiencing a slowdown, others continue to ascend, indicating there are still compelling opportunities in the mega-cap tech sector.
Laura Martin, a sector expert at the investment research firm Needham, has examined Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META), the parent companies of Google and Facebook, respectively, to determine which represents the superior tech stock to buy. Let’s delve into her analysis.
Starting with Google’s parent company, Alphabet, it stands as one of the few trillion-dollar-plus companies on Wall Street, boasting a market capitalization of $1.75 trillion, ranking it as the fifth-largest publicly traded company globally. Alphabet’s primary asset is Google, the world’s leading internet search engine, complemented by YouTube, the premier online video content search engine.
Alphabet’s dominance and success stem from its adept monetization of the internet search sector, yet the company is diversifying its portfolio across various tech domains, with a particular focus on artificial intelligence (AI). Notably, its autonomous vehicle venture, Waymo, has deployed self-driving cars in San Francisco, and its Bard chatbot utilizes generative AI technology. Moreover, Alphabet has garnered positive attention for its development of Large Language Models (LLMs), a service within Google Cloud leveraging AI and natural language processing for text translations and the creation of multilingual content.
While Alphabet’s foray into AI ventures has been largely successful, there have been some notable setbacks, such as the Gemini interactive generative AI bot’s misinterpretations of user requests. Despite such glitches, Alphabet remains financially robust, anchored by its flagship Google search engine, which commands over 83% of the online search market and reaps significant rewards from ad monetization. Its closest competitor, Microsoft’s Bing, holds just a 9% share in the niche.
In terms of financial performance, Alphabet reported a robust 13% year-over-year revenue increase in the fourth quarter of 2023, totaling $86.3 billion. This quarterly revenue surpassed forecasts by $1.04 billion. On the bottom line, Alphabet delivered $1.64 in diluted EPS by GAAP measures, exceeding estimates by 4 cents per share. Over the past 12 months, GOOGL shares have surged by 54%, outperforming the NASDAQ’s 45% gain during the same period.
Analyst Laura Martin, covering Alphabet for Needham, identifies several advantages that position the company as a top pick. She highlights increased ad spending during election years and the value of AI for Google’s operations. Martin emphasizes the significance of Alphabet’s proprietary large language models (LLMs) as a key driver of upside value in the coming years. She anticipates that thousands of small and medium-sized businesses will develop apps on LLMs, generating revenue for Google Cloud (GCS). Martin quantifies her bullish stance by assigning Alphabet stock a Buy rating, with a $160 price target, implying a ~15% share gain over the next 12 months.
The consensus view on Wall Street aligns with Martin’s optimism, with 29 Buys and 8 Holds among the 37 recent analyst reviews, resulting in a Strong Buy rating for GOOGL shares. With the stock currently trading at $139.73, the average target price of $164.59 suggests a potential one-year upside of ~18%.
The second company analyzed by Needham’s Laura Martin is Meta, the parent company of Facebook, Instagram, Messenger, and WhatsApp. Meta stands as the sixth company to achieve a market capitalization exceeding $1 trillion, currently boasting a market cap of $1.26 trillion, ranking it as the sixth-largest publicly traded company on Wall Street.
The foundation of Meta’s colossal valuation lies in its dominance in social media. The company commands impressive audience numbers across its platforms, serving as the cornerstone of its monetization endeavors. In Meta’s most recent quarterly report for the fourth quarter of 2023, the total ‘family daily active people’ (DAP) reached 3.19 billion for December, while ‘family monthly active people’ (MAP) tallied at 3.98 billion. These metrics represent the cumulative user base across all of Meta’s platforms, nearly half the global population of 8.1 billion.
Facebook, Meta’s flagship app, boasts staggering user figures, with a daily active user (DAU) count of 2.11 billion and a monthly active user (MAU) count of 3.07 billion in December. Such unparalleled user engagement is a rarity in the corporate landscape.
Despite Meta’s impressive user base, the company faces a significant challenge in 2024 related to Google’s shift in cookie policy. Google’s decision to cease supporting third-party cookies on its Chrome browser will impact Meta’s ability to utilize these tracking tools for monetization efforts. However, Meta possesses robust resources to address this challenge, evident from its strong financial performance. In the fourth quarter of 2023, Meta reported revenue of $40.11 billion, marking a 25% year-over-year increase and surpassing expectations by $940 million. The company reported a GAAP EPS of $5.33, exceeding estimates by 39 cents per share.
In addition to these robust results, Meta announced its inaugural common share quarterly dividend of 50 cents per share, scheduled for payment on March 26. Looking ahead, the company’s annualized dividend rate of $2 per share yields a modest forward yield of 0.4%. Notably, Meta’s confidence in initiating dividend payments is underscored by an additional $50 billion authorization for share repurchases.
However, despite Meta’s achievements, Laura Martin does not advocate buying shares of this mega-cap social media/tech firm. She highlights several headwinds, including Google’s cookie policy shift and heightened content competition from platforms like YouTube and TikTok. Martin rates Meta shares as Underperform (Sell), citing concerns over unfavorable rule revisions impacting revenue and potential negative network effects driven by competition.
In contrast to Martin’s assessment, the broader Wall Street sentiment remains overwhelmingly bullish on Meta, with 40 Buy ratings, 2 Holds, and 1 Sell among 43 recent analyst reviews, resulting in a Strong Buy consensus rating. The average price target of $528.80 implies a potential one-year upside of ~7% from the current trading price of $495.27.