The prospect of Fed rate hikes and Facebook-parent Meta Platform’s mixed fourth-quarter results last week saw a swift market selloff. It dragged down the entire tech sector, and hit FB particularly hard, driving the stock down 26%, as of Feb 04, 2022. However, Morningstar equity analyst Ali Mogharabi argues the market has overreacted, creating an attractive opening.

Some blue-chip tech stocks are now on double-digit discounts after the recent rout. With sound fundamentals, these names have a long growth runway ahead and can withstand the short-term effects of central bank policy moves and geopolitics-driven investor sentiment.

Long-term investors looking to boost or build tech exposure may want to capitalize on this value opportunity and load up on the following tech behemoths.

Amazon.com Inc
	Ticker	AMZN
	Current yield:	–
	Price	US$2,776.91
	Fair value:	US$4,100
	Value	32% discount
	Moat	Wide
	Moat Trend	Stable
	Star rating	****
Data as of Feb 04, 2022

Ecommerce giant, Amazon (AMZN) boasts a whopping US$386 billion in net sales and approximately US$578 billion in estimated physical/digital online gross merchandise volume in 2021. Retail represents about 80% of total revenue, followed by Amazon Web Services (10%-15%), and advertising services (5%). International sales account for 25% to 30% of Amazon’s non-AWS sales, led by Germany, the U.K. and Japan.

“Amazon dominates its served markets, notably for e-commerce and cloud services,” says a Morningstar equity report, stressing that the firm “benefits from numerous competitive advantages and has emerged as the clear e-commerce leader given its size and scale.”

The unabated global shift towards e-commerce helps Amazon continue to capture ever-growing market share. The company’s subscription-based service “Prime ties Amazon’s e-commerce efforts together and provides a steady stream of high margin recurring revenue from customers who purchase more frequently from Amazon’s properties,” says Morningstar equity analyst Dan Romanoff, who puts the stock’s fair value at US$4,100.

Amazon is also a clear leader in public cloud services through Amazon Web Services (AWS). The segment clocked 40% growth in the fourth quarter “off of a US$13 billion revenue base a year ago,” says Romanoff, who views “advertising and AWS as key long-term drivers for shares.”

The tech major’s wide moat, or sustainable competitive advantage, stems from its size and scale, which yield an unmatched selection of low-priced goods for consumers. 

AWS, advertising, and subscriptions are growing faster than e-commerce, says Romanoff who expects “these three areas to be the main growth drivers over the next five years.”

 

Alphabet Inc C
	Ticker	GOOG
	Current yield:	–
	Price	US$2,853.01
	Fair value:	US$3,600
	Value	21% discount
	Moat	Wide
	Moat Trend	Stable
	Star rating	****
Data as of Feb 04, 2022

Google parent Alphabet Inc (GOOG) is an internet media giant. Google generates 99% of Alphabet revenue, of which more than 85% from online ads. Google also derives revenue from apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Its suite of hardware such as Chromebooks, the Pixel smartphone, and smart homes products (Nest and Google Home), also contribute to other revenue.

Alphabet is also invested in health tech (Verily), faster Internet access (Google Fiber), self-driving cars (Waymo), among others.

The tech juggernaut rules the online search market with Google driving the bulk of revenue growth and cash flow. “We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market,” says a Morningstar equity report, which forecasts YouTube will contribute more to the firm’s top and bottom lines.

Alphabet’s investments in moonshots seem attractive, and while it remains to be seen if they will generate positive returns, “they do present significant upside,” the report notes.

As more people adopt its products, Google’s ecosystem gains heft which makes its online advertising services more attractive to advertisers and publishers. This network effect leads to “increased online ad revenue which we think will continue to grow at double-digit rates after the pandemic and during the next five years,” says Morningstar equity analyst, Ali Mogharabi, who recently raised the stock’s fair value 4% to US$3,600.

Alphabet recently reported strong fourth-quarter 2021 results, driven by continuing growth in search advertising, YouTube monetization, and acceleration of Google cloud growth. 

 

Meta Platforms Inc Class A
	Ticker	FB
	Current yield:	–
	Price	US$237.76
	Fair value:	US$400
	Value	41% discount
	Moat	Wide
	Moat Trend	Stable
	Star rating	****
Data as of Feb 04, 2022

Newly rechristened social media giant Meta Platforms (FB) is the parent company of the world’s largest online social network Facebook with 2.5 billion monthly active users. The firm’s most popular products include the Facebook app, Instagram, Messenger, WhatsApp, and many features surrounding these products. Advertising revenue represents more than 90% of Meta’s total revenue, with 50% coming from the U.S. and Canada and 25% from Europe.

The growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers. “The combination of these valuable assets and our expectation that advertisers will continue to shift their spending online bodes well for Facebook, as the firm generates strong top-line growth and cash flow,” says a Morningstar equity report.

Facebook has become a large repository of videos and pictures shared by users and their social networks. While utilization of consumer data is under scrutiny, Facebook’s large audience size continues to attract ad dollars. “Growth in Facebook’s average ad revenue per user indicates advertisers’ willingness to pay more for Facebook-placed ads, as they expect high return on investment from the targeted ads,” points out Mogharabi, who puts the stock’s fair value at US$400, and projects 16% average annual growth over the next five years.

Meta’s revenue growth will be driven primarily by online advertising. Morningstar forecasts a 15% increase in 2022 ad revenue followed by 18% growth in 2023, assuming a continuing global economic rebound. 

Facebook recently suffered one of its worst selloffs triggered by weaker earnings results creating “an attractive investment opportunity,” says Mogharabi.