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Big Tech Top Picks - Amazon & Meta

1 Corinthians Chapter 2 verse 9 states, "However, as it is written: What no eye has seen, what no ear has heard, and what no human mind has conceived - the things of God has prepared for those who love him."


I often find that it isn't as controversial to talk about Jesus, especially with respect to his two greatest commands - to love God above all else and to love others as I would love myself. But when it comes to the topic of heaven and hell, it gets a little more dicey. As a Christian, I believe that both are real and Jesus had much to say about them. Heaven is what God has prepared for those who will believe in Him, and right now, our only glimpse of it is what we see here on earth. God is the supreme authority above all else, and heaven will have some similarities to earth, but also will be beyond our imagination. Hell was never prepared for humanity (God's creation) as God states that His desire is for non to perish (humanity), however, whether I go to heaven or hell is my personal choice as to dependent upon my acceptance or rejection of Jesus Christ as my Savior.


With respect to investing, I know that I am on a solid path towards deconstructing and analyzing companies and making my investment decisions. Regardless, the stock market is the driving force that determines SPs and performance ultimately. With the severe recession and correction for aggressive growth and Big Tech being worked through, it is a reminder that no matter the level or sophistication of investor, professional or retail, there will be times of great pain. Similar to how I rely upon my belief in God for His promises, I will continue to rely upon management tools and strategies to continue to defend the portfolio. Performance in the market cannot be measured in a couple years, it takes 5, 10, 20 and longer increments to truly gauge success.


As many of you may already know, I am not a fan of Big Tech. I am an aggressive growth investor with my own portfolio under management, and I am a big fan of companies looking to push the limits and take risks to become market leaders. I don't own any Big Tech companies, but I do believe that it is worth having an opinion on who are the risk takers within the Big Tech realm and why they will likely outperform their peers.


I have not extensively reviewed all Big Tech names yet, and I've focused on the most popular to start including FAANG-M (Facebook/Meta, Amazon, Apple, Netflix Alphabet/Google, and Microsoft). I've already written on Alphabet, Apple, Microsoft, and Netflix, deeming them as much less innovative and slower growth Big Tech peers. This leaves us with Amazon and Facebook, which I believe to be some of the more innovative risk takers that will likely reward investors better over time.


Amazon

Amazon, Inc. (AMZN) saw a very robust 2021 year with Revenue growth at 21%, declining from 2020's 38% performance. In fact, Amazon has averaged annualized Revenue growth of 28% since 2009 through 2021, and ironically the exact same average over the previous five years from 2016 through 2021.


My forecast over the next five years is projecting Amazon to grow Revenue at an annualized rate of 15% towards $1 trillion. Clearly Amazon witnessed an extreme OCF margin expansion in 2020 above 17% that likely will not be repeated anytime soon, with 2021 returning to the 10% level. I do believe that the company will be able to see modest margin expansion, but I'm currently only modeling them to grow towards a 12% OCF margin over the mid-term. This is still positive as nominal and OCF/share are expected to grow greater than 18% annualized over this period.


Amazon is very similar to Microsoft Corporation (MSFT) as we can see how their operating segments continue to expand over time. Amazon just recently this past 10-K filing broke out a new segment in Advertising Services, formerly embedded within the Other category. As can be seen, Amazon has successfully scaled this segment with the 2022 estimate at just below $39 billion. The Advertising Services segment has grown at an annualized rate of 66% over the past five years from 2016 through 2021, and I expect it to continue to be one of Amazon's top Revenue growth drivers over the mid-term.


So why does Amazon stand out? Simply, the company stands out as it is highly focused on re-investing back into the business to continue to push growth versus simply buying back stock and paying out dividends, irrespective of its scale. The clearest indicator for this is the company's R&D and Capex spend. Amazon in 2021 spent $56 billion in R&D and over $60 billion on Capex for a combined $117 billion out of $470 billion in Revenue. That's 1/4 of total Revenue. Here's how the other Big Tech peers stack up:

  • Alphabet: 21% at $56.2 billion

  • Apple: 9% at $33 billion

  • Meta: 37% at $43.3 billion

  • Microsoft: 25% at $41.3 billion

  • Netflix: 9% at $2.9 billion

Only Microsoft equals Amazon's proportional spending of R&D and Capex against Revenue, with Meta being the clear leader. Nominally though, no one compares to Amazon as they are investing double the amount of R&D and Capex into their business versus Alphabet, and nearly the same as the remaining companies combined. I've said it many times that for innovation and risk taking to be achieved, how a company invests back into the business is the fundamental driver towards success.


The only problem I have with Amazon is valuation. Before their 13.5% run-up yesterday, the company was trading at a much better SP to be closer to returning an annualized 15% over the mid-term. However, I don't see much higher than an annualized return of 11% now. This is based on my opinion that Amazon cannot be justified trading higher than 3 times EV/Revenue and 25 times SP to OCF/Share. It currently is trading higher today and that's why it is overvalued, especially with annualized Revenue growth expected to slow, and OCF margin now more normalized. That being said, no other company in Big Tech is investing back into the business as aggressively as Amazon, which affords a better chance of higher and/or newer growth.


Meta

Meta Platforms, Inc. (FB) had its best year in 2021 since 2018 from a Revenue growth perspective performing 37% better than 2020. Meta has been a growth machine with annualized Revenue growth at 46% since 2010. Growth was headed lower before the pandemic and like other Big Tech peers, Meta was saved.


Meta recently reorganized the Operating Segments into Family of Apps and Reality Labs. My current financial model is built upon the former Operating Segment structure and I will need to modify it. As such, I would view the information above cautiously as it likely is currently not accounting for the Reality Labs segment potential. That being said, I do expect Meta to experience a significant slow-down in its core Family of Apps segment Revenue growth. This was a key reason why the SP plummeted Thursday and remained weak yesterday.


However, with the recent 10-K filing, it was interesting to see just how aggressive Meta is being for its goal to pivot to the Metaverse. We've all heard the talk from Apple, but over the past two years, Meta has spent over $20 billion in Cost and Expenses for Reality Labs. Investors should remember that Meta only generated $2 billion in Revenue in 2010, which now stands just below $120 billion. I'm not saying that the company will see an exact replication for Reality Labs over the next decade, but through the Family of Apps segment, Meta will be well positioned to continue to leverage its substantial Cash Flow to invest aggressively into R&D and Capex as highlighted above.


Meta is difficult to model right now as the anticipated slow-down in Family of Apps growth will weigh on the company. The company is essentially seeing a potential 50% annualized reduction in Revenue growth from this segment over the mid-term. For now, I feel that the current pullback was warranted. But the key observation from my financial model is that even with Meta's core Revenue segment seeing a strong decline in growth, the SP still could return 15% annualized on that variable alone. This offers impactful upside potential in the event Meta continues to lead the Metaverse market, especially if the company can scale quickly.


Conclusion


It's not that complicated, companies willing to take risk and innovate through putting their money where their mouth is are going to offer investors the strongest investment return potential. Companies like Alphabet, Apple, Microsoft, and Netflix are spending way too much money on Share Buybacks and Dividends with Apple being the most egregious. In the case of Netflix, their core business model is incapable of generating OCF, so their R&D and Capex spends are restricted. If I were looking to invest in Big Tech companies, I'd have my eye on Amazon waiting for a sub-$2,800 pullback and Meta, whos SP may be at the right level currently.



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