Some FAANG names ‘are still high-growth internet companies,’ portfolio manager says

Independent Solutions Wealth Management Portfolio Manager Paul Meeks sits down with Yahoo Finance Live to talk about tech earnings reports this week after Netflix's flop, tech sector growth, and the outlook on FAANG stocks, Microsoft, IBM, and AT&T.

Video transcript

BRAD SMITH: All right, guys. And for more on the tech sector companies reporting earnings this week, let's continue the discussion and bring in Paul Meeks, Independent Solutions Wealth Management Portfolio Manager. Paul, good to have you here with us today. You heard the breakdown for what we're watching going forward this week.

The big question that I have, though, with regard to how we've been tracking the FAANG names for years now-- nearly a decade at this point in time-- are they still high growth internet names given some of the early churn that we've started to see in Netflix, we've been watching closely Facebook over the past few weeks and months? And this is going to be a critical quarter for them as they've already signaled where they're going to see a lot of cash going out the door as they prepare for the metaverse.

PAUL MEEKS: I think a subset of the FAANGs are still high growth internet companies. And I would say Google, Microsoft are probably the keys. Frankly, as you saw with the plunge last week in Netflix, I think that's probably a growth company going forward, but much slower, no longer a internet darling, no longer an aggressive growth company.

Facebook, AKA Meta-- I'm worried about their change in business model. I don't know what that's going to be. And Amazon is facing serious expense increases. And some of that was COVID-related and some of it was not COVID-related.

So I think, as I said just now, the subset of Google, Microsoft would probably be-- and maybe Apple too-- would probably be the ones I would favor within the broader FAANG group. The others I'd probably stay away from for now.

BRAD SMITH: XLK down about 20% year-to-date thus far Paul. What would you consider to be a win this earnings season for the tech sector?

PAUL MEEKS: Well, I don't think you can expect universal great reports. We've already seen one of the biggest marquee names, Netflix, you know, fall on the sword. You know, what I'd like to see is if you can get the other marquee names not to blow out the numbers, right-- because their valuations have already been squeezed enough, so they're attractive the way they are. If they can hold their numbers, that'd be revenue and earnings per share for this quarter, make sure that they don't disappoint for next-- I don't think we need to have big positive earnings surprises, I don't think we need to have big pops and guidance. We have to stabilize. And at this point, the valuations have shrunk. So even in that scenario, they could become attractive relative to non tech companies.

BRAD SMITH: I think about the amount of advertising campaigns that some of these companies would need to see run to also maintain some of their profitability margins as well. Amazon and Netflix, they could see growth from advertising in the future should we see some type of advertising-backed tier for Netflix in the future. And Amazon, they've touted conversion rates for years now at this point in time. But does growth for those to cut into existing revenue and margins for a company like Meta platforms and even more so, like, Google, Alphabet?

PAUL MEEKS: I don't think Netflix really plays into that here. But Amazon's advertising business is actually quite large, buried under their broader numbers, and growing quite quickly I think there is no doubt that over time, one of the most exciting aspects of the Amazon story is their advertising business. And yes, I don't think they will climb the ranks and really challenge Meta and Google for US digital advertising dollars and global digital advertising dollars, for that matter, but they will be a strong three and four. Yes, and that business, just like AWS became important for them in 2006 when they got into the cloud, for Amazon and Amazon shareholders, continued strength in their advertising business probably much more important to that stock than whatever happens in e-commerce for them.

BRAD SMITH: Paul, let's talk about the yesteryears ugly ducklings, as you've called them in your notes. You believe there are safer tech names. What's your relationship with those and why do you believe that they should be reconsidered?

PAUL MEEKS: Yeah, so I think that you've seen the valuations become quite attractive. I also think that in this environment, you don't necessarily want to pay up for high valuation multiples. So some of the ugly ducklings I'm talking about-- IBM. I haven't been interested in IBM for eons. So IBM under their new management and their new focus is starting to grow again.

In the meantime, they have a whopping dividend. And dividend investors are helped in this particular environment with interest rates on the rise. Also AT&T-- a dog with fleas for a long period of time, a very bad move to essentially try to become a media conglomerate. Now, they've unwound that. They're sticking to their knitting. And they look like they have the best sub growth among the major wireless US carriers, and now paying a 4% or 5% dividend yield-- and just showing a quarter where they showed great sub growth whereas Verizon showed a shrinkage. So IBM and AT&T, two hideous companies from yesteryear I actually like more than some of the internet darlings within the tech sector right now.

BRAD SMITH: All right, Paul Meeks shouting out you're my boy, Blue, and how much is that doggie in the window at the same time. Independent Solutions Wealth Management Portfolio Manager Paul Meeks joining us here this afternoon. Appreciate the conversation.