Market Views: the Meta fall and what it means for investors

Dragged down by less-than-satisfactory financial results, Facebook and Instagram owner Meta last week saw more than $230 billion wiped off its market value, marking the biggest one-day drop for any US stock in history.

While some asset managers believe that US stocks in general are primed for a correction, some are banking on robust fundamentals to underpin the tech market while others still are shifting to Asian, especially Chinese, stocks and away from the US.

The sharp decline in Meta's fortunes came after the company reported slowing user growth. The shareprice slumped 26% on February 3, closing the day at $237.76. Since then, it has continued to shed value, yesterday (February 10) falling to $232 apiece.

The fall caught other US-based social media platforms in the vortex, including Twitter, Snap and Pinterest. However, Snap's shares had a violent reversal fortunes, jumping by almost 60% in after-hours trading after it reported its first ever quarterly profit.

This week, however, Wall Street picked up as tech shares led a broad rally.

On February 9, the Nasdaq Composite jumped 2.08% to close at 14,490.37. The S&P 500 gained 1.5% to 4,587.18, while the Dow Jones Industrial Average rose 0.86% to close at 35,768.06.

Wednesday’s gains were highlighted by some of the same stocks that outperformed during the pandemic lockdown, including e-commerce stock Shopify and Etsy.

ASIA SHIFT?

On the other side of the world, meanwhile, Asian equities dropped to a 21-month low at the end of January as expectations of aggressive policy tightening by the Federal Reserve, and a surge in US bond yields, hit regional stocks.

The MSCI Asia-Pacific index's forward 12-month P/E ratio stood at 13.49 at the end of last month, its lowest since April 2020, according to Refinitiv data.

ALSO READ: Investors seek opportunities in cheaper Chinese tech stocks

AsianInvestor asked experts how asset managers would invest in US stocks and how the Meta drop might affect investor confidence over a longer time horizon.

The following responses have been edited for brevity and clarity.

Jon Guinness, portfolio manager
Fidelity International

There are undoubtedly expensive areas of the market - particularly among some of the higher growth, more speculative (unprofitable) names. Though given the selloff we have seen in the last few weeks, valuations on some of these names have come down. Though I am a long-term thematic investor, I am not prepared to pay excessive multiples for growth; I am looking for underappreciated growth among companies with proven end markets and robust fundamentals.

Fortunately, there are still many reasonably valued stocks within my theme. Superior earnings growth versus broad global equities continues to underpin TMT strength. Tech business models are increasingly based on recurring revenue, and meetings we did last month with leading US technology firms highlighted the strength of their pricing power.

The pandemic led to a massive step up in tech use by consumers and businesses. Though we have seen some drops in use in certain ‘Covid winner’ stocks, I would also emphasise the ‘stickiness’ of many of the connectivity trends stemming from the pandemic. Whether it is technology to support hybrid working or new consumer services, the last two years have shown how reliant we are on technology across our working and home lives. This underpins the long-term opportunity for investors.  

Martin Moeller, co-head of Swiss and global equity
Union Bancaire Privée

After the harsh reaction to the latest earnings report and outlook, a technical rebound is possible for Meta shares as investors notice the below-market average valuation for a stock, that may not be the fastest growing in the technology sector any more, but still offers mid-teens revenue growth. A more sustained share price recovery may be driven medium-term by clarity about the maximum spending on new initiatives like Virtual Reality, and finally those investments lessen the current burden to earnings.

The direct impact on the sector is limited. As we have seen, companies reacted very specifically to disappointments (Netflix), and positive surprises (Amazon). In general, the large Tech companies have been spending frequently billions on new projects in the form of capital expenditure, R&D, marketing, and other operating expenses. However, over the medium-term companies showed significant payback from these investments in the form of revenue growth and strong cash generation which has been used for reinvestment into the business, dividends and buybacks. We would expect this trend to continue, and while Amazon may be close to a temporary peak in spending relative to sales, other companies may see some increase of the ratio.

We find companies with high and stable, or growing, levels of Cash Flow Return on Investment (CFROI®) have shown attractive performance over the long term. The US technology sector is providing many attractive growth companies with such characteristics. While the sector also offers interesting unprofitable high growth companies with high risks, we would typically prefer stocks with limited capital intensity, still attractive growth, high margins, and hence high CFROI combined with capital return opportunities via growing dividends and share buybacks.   

Mark Baribeau, head of global equity
Jennison Associates

At the end of November 2021, growth equities with high valuations began to underperform the broader market as concerns arose about the potential impact of rising interest rates on valuations. Against this backdrop, technology stocks have been hit especially hard. Although we expect short-term volatility, as long-term growth investors we believe the fundamentals of the technology sector remain strong.

On the whole, recent earnings in the technology sector continue to be robust, confirming the underlying strength in many companies and secular trends like the accelerated CAPEX spend on tech, software, and R&D. In addition, many pre-pandemic trends continue to gain pace. The shift to direct-to-consumer business models and the digital transformation of the enterprise are thematic examples of trends that we believe will continue to be supported by behavioral changes. The pandemic has also accelerated the adoption of digital technologies by several years, and we expect that many of these changes will be permanent.

To remain competitive, companies understand that they must value technology’s strategic importance as a critical component of business, not just as a source of cost efficiencies. As a result, businesses are making investments that are likely to ensure the trend’s perpetuation. Going forward, we believe the market should continue to favour companies with asset-light business models, disruptive products, and faster organic growth.

Eli Lee, head of investment strategy
Bank of Singapore 

Valuations of Chinese equities are undemanding, especially when compared to the US, which points to significantly more attractive risk-reward. The 12-month forward price-to-earnings for China is close to its 10-year average while that for the US is 1-standard deviation above.

This combination of the turn in macroeconomic backdrop and attractive valuations suggests relatively more attractive risk-reward in Chinese equities in 2022, which underpins our shift in overweight positions in equities from the US to Asia ex. Japan.

Marquee internet platform names like JD.com, Meituan and Alibaba are currently trading at -1 to -2 standard deviations below their average fiveyear historical price-to-sales ratio, and forwardprice to earnings are also ~0.5 standarddeviations below historicals (Alibaba is muchlower).