The third quarter of 2022 hadn’t been kind to investors, with the S&P 500 declining over 6% throughout the period. But as Warren Buffett famously said, “Be fearful when others are greedy and be greedy when others are fearful”.
Consumer confidence is at a low, inflation is high and market sentiment is teetering on the edge with the prospect of recessions being tossed around in the news. But while it seems like a terrible time for investors, it’s actually an incredibly useful time to be making new investments.
Recent declines in US tech valuations have had some super investors salivating at the prospect of picking up shares in companies where they see long-term value at huge discounts compared to 12 months ago. While their investment doesn’t necessarily signal the end of the difficulties for shareholders, there’s something to be said for their confidence in businesses with solid fundamentals.
Number 3 – Meta Platform
In both Q1 and Q2, Meta appeared among the list of most purchased stocks, and with the stock falling a further 15% across Q3
Meta is a company with a wide moat. It has a large network effect, but of course Meta’s business has changed quite a bit recently.
With the macroeconomic environment as it is, big advertisers are pulling back on budgets. This is evitable in their earnings.
By the third quarter of this year, Meta had realized an 18% reduction year-on-year in the price per advertisement due to declining demand.
Recent pushes from Apple to reinforce user privacy has also negatively impacted Meta, with Apple’s App Tracking Transparency (ATT) rules preventing Meta from using user data in the same way they were previously to optimize the advertisements that would be served up to a user. ATT reportedly reduced the company’s revenues by about US$10B per year.
While Meta’s shift to focus a large amount of resources to their metaverse presence is illustrative of a long-term bet on the future of social interaction, they’re detracting from their bottom-line, making the earnings reports look a little less rosy. In Q3 their R&D ballooned year-on-year to US$9.1B but their revenue actually shrunk, leaving just US$4.4B in net income, a 51.6% reduction compared to the $9.1B in earnings from the same quarter last year.
Number 2 – Microsoft
Microsoft was another poor performer in Q3 with the stock ending the quarter down 10%.
They have three revenue segments:
1) Productivity and business processes
2) Intelligent Cloud
3) Personal Computing
What we’ve seen over the past few quarters is their cloud segment take off and their personal computing segment slow. This is very much a result of the macro environment and the trend of tightening consumer spending amidst record inflation levels.
However, overall Microsoft is generally very well protected thanks to their economic moats in software and cloud and thus, despite the stock falling around 28% year to date, it continues to attract long-term-minded super investors.
Number 1 – GOOGL
Google got 12% cheaper across Q3 but it remains a popular bet among hedge funds and other smart money. The likely explanation lies in its incredibly strong balance sheet with minimal debt – literally $22B in plain old cash and just $14.6B in long-term debt. They have a massive moat in online search and digital advertising, continuing their firm grasp of the market with over 83% of the total search volume in 2022.
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