My Favorite Stocks + Portfolio Update: 2/3/22
Ending the week with my high-conviction plays and updates across the board.
Introduction
Welcome back to another edition of My Favorite Stocks - where we attempt to identify companies whose stock prices are trading wildly below their fair value, speculate on near-term catalysts that drive stock prices higher, or simply share a trend I’m learning more about.
Does this mean that these stocks have 100% “bottomed” and are certain to rise immediately? Of course not. These are stocks that, based on my assumptions and analytical process, are worth more than they trade for in the public markets — and should appreciate over a reasonable time frame.
Checking in on the Portfolio
Before we jump into this week’s edition, I want to spend a moment on the largest positions in my portfolio. These are the Mega-Cap companies that collectively make up ~60% weighting.
Even if we include the -25% drop in price of Bitcoin, we’re about par for the course. As you all know, I’m not the type of investor to meticulously watch the day-to-day or even week-to-week performance of my investments — I have conviction. However, it’s nice to see our largest names hold up relatively well.
We’ve seen a few of them report their earnings results for Q4 / FY21 — and I want to quickly highlight some of my biggest takeaways and a change of course I’m going to make with Facebook.
📉 Facebook (META)
Let’s start by talking about the good — revenue grew by +20%. This is incredible, especially for a company of this size. Love to see that. We also saw some great momentum with Instagram Reels, as Mark stated it was driving incredible growth for the platform.
However, that’s it. The rest of the earnings call and the information presented in the investor deck weren’t too bright.
Operating margin decreased -9% from 46% to 37%, which I’m sure had a lot to do with the company’s investment into the ‘metaverse' but I’m still slightly turned off by this. Their profits also decreased some -8% year-over-year.
As we look toward the CFO’s guidance, we’re looking at a +3-11% growth in revenue — not exactly what we wanted to see. This was lower than anticipated given the attention shift of their consumers as stated below:
“We expect our year-over-year growth in the first quarter to be impacted by headwinds to both impression and price growth. On the impression side, we expect continued headwinds from both increased competition for people's time and a shift of engagement within our apps towards video services like Reels, which monetize at lower rates than Feed and Stories.
On the pricing side, we expect growth to be negatively impacted by a few factors. First, we will lap a period in which Apple's iOS changes were not in effect, and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes. Second, we will lap a period of strong demand in the prior year, and we're hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets.
Finally, based on current exchange rates, we expect foreign currency to be a headwind to year-over-year growth. In addition, as noted on previous calls, we also continue to monitor developments regarding the viability of transatlantic data transfers and the potential impact on our European operations.”
In summary, Facebook is expecting less people to be on their social apps given the increased competition (TikTok, YouTube Shorts, etc). When people actually are using their apps — monetization revenue has decreased given ad spend and iOS restrictions.
Sounds to me like Facebook’s recent pivot toward the ‘metaverse’ is not a marketing stunt at all — instead, they’re trying to build a ‘world’ in which no one entity (Apple) has control over what is shared. Right now, Apple controls nearly everything (in the US) as it relates to mobile-focused consumption of content (iPhone). If Facebook builds some ‘place’ that is out of the hands of Apple (iOS, revenue split from in-app purchases, etc.) the company then controls its own destiny.
Here’s the deal though — this won’t happen overnight and I’m not sure I want to stick around for the ride in the near-term. Unfortunately, Facebook isn’t what I thought they were. We were modeling for +25% growth compounded annually — and that’s obviously not happening anymore. The market refused to assign value to their free cash flows like they had in the past, while continually increasing value to their peers.
It’s Not All Bad..
Before I conclude my Facebook break-up essay, let’s talk about the trade that could be happening because of them — here’s what I mean..
Facebook’s capital expenditures during Q4 were $5.4 billion, an increase of +25% in only 3 months. The company guided to ~$30 billion in additional capital expenditures throughout 2022 — implying a +70% growth year-over-year. This is all going to be spent on data centers, servers, network infrastructure, and office facilities.
According to the company’s management team, most of the spend will go toward developing AI and ML capabilities. Think data center construction, network equipment spend, and software.
I’d imagine a lot of this data center spend will include the real estate itself. These estimates suggest Facebook could be spending $160M on the construction process (1M square foot sites).
If Facebook is backing up the CapEx truck on data centers, it’s safe to assume its building dozens of them — likely in the US.
Again, it’s likely going to take a while before folks figure out where Facebook is spending this $30 billion. But remember the important callout here — Facebook spending $30 billion means other companies will be making $30 billion.
So let’s name off a few companies who might be getting a healthy slice of that $30 billion in CapEx spend throughout 2022:
Arista Networks (ANET) — Facebook is currently their 2nd largest customer behind Microsoft. It’s going to take time to build these data centers, so I’m not positive whether ANET will see a lump-sum up front or sustained spend by Facebook over the coming quarters / years.
Cisco Systems (CSCO) — announced a partnership in November that included their chips going into Meta’s switches.
Ciena Corporation (CIEN) — market leader in optics used to connect data centers. Facebook is already a customer of CIEN and could be working on a larger deal for 2022.
Pure Storage (PSTG) — announced a partnership last week that solidified the company as Facebook’s needed storage platform. Likely not near-term, but Facebook could be driving a lot of revenue to Pure Storage.
📈 Tesla (TSLA)
In case you’re asking where my money (about $9,000) is going to be invested instead — the answer is Tesla. In this post I shared my intent to open a meaningful position, I just didn’t think it was going to be this soon. My goal is not to “ape” into Tesla. Instead, the goal is to continually dollar cost average into a position over the coming 3 to 6 months — as I believe the market has not truly hit the bottom yet.
My goal is to open this position below $850 or so a share, and ride this as low as I can for as long as I can until I have ~5% weighting.
📈 Google (GOOG)
Moving away from rebalancing and touching on updates — Google reported incredible results this week. Revenue increased +32% this quarter, and +41% this year. Profits increased +35% this quarter, and +89% this year — outpacing revenue acceleration. This is what we love to see.
The company’s Google Cloud business segment experienced some +45% revenue growth during the quarter — a great thing to see considering the high margins. Thrilled about the company’s report, its recent stock price performance, and news of a stock split.
I’ll be adding to my Google position on red days throughout February and March — considering both their fundamental momentum and the “retail” momentum they’ll likely experience due to the stock split.
Check out this incredibly well-thought through Tweet below — it really shows just how potentially undervalued Google might be in relation to their peers.
📈 Advanced Micro Devices (AMD)
We recently doubled our position in AMD due to the expected chip sector momentum, and I’m glad we did! They announced earnings this week with record revenue of $16.4 billion, increased margins, and a whopping +229% increase in operating cash flow.
It’s safe to say this company will continue to be one I’m adding to on red days.