Take Alphabet over Meta and Netflix, this investor says

You can count the ways Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL) will remain a strong name in the tech communication space for years to come, says portfolio manager Gordon Reid. But the same can’t be said for social media giant Meta Platforms (Meta Platforms Stock Quote, Charts, News, Analysts, Financials NASDAQ:FB) or streaming king Netflix (Netflix Stock Quote, Charts, News, Analysts, Financials NASDAQ:NFLX), both of whom have some major question marks about the road ahead.

“Google has come down a lot. The FAANG stocks have been out of favour. But when you look at at what Alphabet/Google is doing, it remains very exciting,” said Reid, CEO of Goodreid Investment Counsel, who nominated Alphabet as one of his top picks for the 12 months ahead on a BNN Bloomberg segment on Wednesday.

All of Big Tech has been taking it on the chin over the past while, as the market continues its rotation away from purportedly more risky, growth-oriented names and toward defensive plays like banks and utilities. It’s been the story of the market so far this year, as many of the names now suffering did tremendously well during the pandemic when technologies like content streaming and video conferencing became more valued and everyone was buying online and boosting earnings for e-commerce companies. 

But with the pandemic is seemingly at a low ebb and central banks looking to tame inflation by lifting interest rates, the pressure is on more growth-facing companies like the FAANGs.

The result is that since mid-November of last year, Alphabet is down about 20 per cent, Amazon is off by 34 per cent, Meta is down 48 per cent and Netflix is down a full 70 per cent.

It’s impossible to predict when the damage will have run its course, but in the meantime there’s a company’s fundamentals and the business itself to focus on, and from that perspective Alphabet is a clear winner, says Reid.

“Alphabet owns search, of course, their cloud business is very, very profitable and growing very quickly and they’ve got other bets which come out of their $20 billion yearly R&D budget. So, they’ve got a great many very, very talented, smart people working to develop new products for Alphabet that will be able to build and monetize into the future,” Reid said.

Reid also pointed to Alphabet’s YouTube asset which while not much of a revenue generator a half-decade ago is now a big money-maker. YouTube ads made up ten per cent of the company’s topline in its latest reported quarter, for instance, and posted a 14 per cent revenue growth rate.

“This is a company that’s growing at 20 per cent annually, both revenues and earnings, and trades are about 20x earnings, so it’s a very inexpensive way to get into the communication services area,” Reid said.

His takes on Meta and Netflix are less rosy. In the case of Meta, Reid said his company sold their position on FB last year when the stock started to falter and sees no reason to jump back in, especially with uncertainties surrounding the company’s seemingly all-in bet on the metaverse.

“We just couldn’t see the business plan as clearly as we needed to, moving away from their traditional businesses into the metaverse and it just wasn’t clear enough to us that they were going to sustain the types of growth rates that we needed,” Reid said.

As for Netflix, Reid says he prefers Disney in the streaming space, arguing that the drop in its share price has been a bit too heavy-handed considering all the assets the company has in theme parks, media and streaming. Netflix, on the other hand, has a tough row to hoe with its constant need to produce new content.

“Cash flow is challenged [for Netflix],” Reid said. “The earnings tend to stand out better and the reason is that they amortize a great many of their costs of producing original productions over many years so they don’t hit the earnings line, boosting the earnings in the early days. But it does hit cash because you have to pay for it, so in looking at Netflix, watch the cash not the earnings and be a little bit careful. I’d rather go with a Disney that has more diversification.”