After high-profile selloffs, are Meta and Spotify a ‘Buy’?
Link copied to
Montaka Global still sees value in Spotify and Meta – two big names that have come under pressure amid the rising market volatility this year.
Some other tech giants you may have heard of – Alphabet (Google), Microsoft, Amazon – also feature in the Top 10 holdings of the group’s ASX-listed Montaka Global Long Only Equities Fund (ASX:MOGL).
For now, it’s top-down macro thematics that are grabbing all the headlines as Russia’s invasion of Ukraine prompts a major geopolitical fallout that will spill across global markets in the week ahead.
Investors are awaiting the market reaction following a coordinated policy response against Russia’s financial system over the weekend, including a freeze on the assets of Russia’s central bank and the removal of other Russian banks from the SWIFT global payments network.
Shortly prior to the conflict, Stockhead caught up with Montaka portfolio manager Chris Demasi.
At that point, the heat was already on tech stocks as investors demanded more strong earnings and growth in the wake of the post-COVID rally.
But Demasi said there’s a good reason why well-known tech behemoths maintain a strong weighting in the Montaka portfolio.
“A lot of investors find those names boring,” Demasi says. “But we like them.”
“They’re ‘boring’ in a sense because people know the names and they’ve done well before.”
“But interestingly, the misperception is they can’t continue to grow and perform strongly in the future.”
Montaka Global sees value in the Spotify share price as well as Meta – two big names that have come under pressure amid the rising market volatility this year.
Some other tech giants you may have heard of – Alphabet (Google), Microsoft, Amazon – also feature in the Top 10 holdings of the group’s ASX-listed Long Only Equities Fund (ASX:MOGL).
In a recent Stockhead interview, he explained why.
From a post-COVID high above US$360 in February 2021, the Spotify share price has fallen to around $150.
Similarly, Meta shares are down from almost US$400 in September to around $US200, following a particularly brutal selloff in the wake of its December quarter trading update.
In a more volatile macro environment, the heat is on tech companies to maintain their torrid post-COVID growth rates.
Spotify’s latest quarterly showed its active user base climbed above 400m people, but analysts were looking for more in its projected growth numbers.
The recent controversy surrounding podcaster Joe Rogan has also weighed on the stock.
Meta’s latest results – where it said user growth stalled for the first-time – resulted in a historic one-day plunge that briefly rattled global markets.
Are they now a Buy?
While growth rates are one thing, Demasi reckons the market is under-pricing Spotify’s potential to monetise its existing user base.
“We think they’ve established a platform now – effectively an ecosystem for the audio creator economy,” he said.
“As it develops they’ll ultimately be able to provide new and different experiences that Spotify can monetise – but that hasn’t happened yet.”
The other channel where Demasi sees growth is in advertising, as a complement to a core subscription model. And the upside there is one reason why Montaka thinks the Spotify share price looks cheap at current levels.
“Their advertising business is growing quickly – around 50% per year,” he said.
“I think people view Spotify as a subscription model, but with the advent of podcast content and the buildout of their ad network, they’re really starting to exponentially increase the amount of ad spend revenues.”
“There’s a huge pool of money that goes to traditional radio today that I think they’re going to capture with that opportunity.”
And while the Rogan controversy may have acted as another drag on the Spotify share price, Demasi said it “doesn’t really impact their long-term thesis”.
The Joe Rogan pod is one of over three million podcasts on the platform, he said.
That creates “a way for Spotify to just tap into so many different interests and therefore monetise a user base of 400m which is still growing.”
“So we look at it as a platform that can build out the audio creator economy, monetise users at higher rates and then expand their advertising business.”
For Demasi and the Montaka team, Meta is going through an “uncool” patch after a decade-plus as the cool kid in global tech.
But in their view, that also makes it cheap.
In light of its high-profile selloff, the stock is trading at around 13x operating profit.
By comparison, Aussie blue chip Woolworths (ASX:WOW) trades at 21x and is “projected to grow at a quarter of the growth rate of Meta”, Montaka said in a recent research report.
Where’s the Meta growth going to come from?
Montaka says that while top-line user growth rates slowed in December, Meta has established itself as a diversified platform with new profit drivers.
Chief among them the strength of its online Shops marketplace.
“Already, 250 million people are visiting more than one million active Shops each month,” Montaka says.
One of the primary bear cases for Meta is tied to Apple’s 2021 rollout of privacy changes, which make it more difficult for advertisers to track users.
However, Montaka says its research on the ground shows the ability of Meta’s platform to pivot.
“We have interviewed retailer advertisers and they have told us that their ROI (return on investment) on closed-loop digital advertising tied to Shops transactions is multiples higher than the historical ROI” on Meta (which was already an industry leader), Montaka said.
Along with its platform position for retailers and content creators, Montaka also turned its attention to the virtual elephant in the room – the company’s pivot to the metaverse and subsequent name-change.
At this relatively early juncture, it’s easy to be sceptical of the commercial opportunities in virtual worlds that don’t really exist yet.
Yes, there’s the name change (from Facebook to Meta) – but the real numbers involved in the company’s metaverse pivot are nothing to sneeze at, Montaka says.
Meta has booked in a 60% increase on R&D spending and general capex for 2022 towards its metaverse strategy.
For a US tech heavyweight, that equites to a dollar-figure in the vicinity of A$100 billion.
In context, “this is more than twice the annual level of Australia’s national defence spending”, Montaka says.
So whether or not investors are taking the metaverse seriously, Meta definitely is.
Following its earnings plunge, Meta shares have dropped more than 35% in February alone.
And here’s Meta chief Mark Zuckerberg himself on the metaverse pivot:
“I think what you’ll see is us putting more of the foundational pieces in place.” The metaverse “is not an investment that is going to be profitable for us anytime in the near future.”
In addition, US accounting rules means Meta will have to expense (rather than capitalise) its R&D costs. That means development expenses will drag on the bottom line in both 2023 and 2024.
But amid the hoopla around user growth and the metaverse, another Meta attribute has slid under the radar – the existing strength of its core advertising model.
Total monthly users Facebook and Instagram still come in at 3.6 billion people, Montaka says.
And investors “do not appreciate” how much value can still be unlocked there.
“Of the 200 million businesses with a presence on these platforms, only 10 million spend any money on digital advertising,” Montaka said.
In Montaka’s view, a lot of that can still be converted through Facebook Stories, Instagram Reels and Facebook Messenger.
So in aggregate, the recent selloff marks an opportunity to take a valuable long-term bet on a tech major with established revenue streams.
Turning back to its Woolworths comparison, Montaka says Meta’s share price is in fact a material discount to the company’s fair value.
“For those who can see the true potential in its core advertising business, the upside in its three new growth options, as well as its hidden low valuation, the company is a definite ‘like’,” Montaka said.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.