It's been a brutal few months for growing tech stocks. What started as a mild sell-off on omicron variant concerns after Thanksgiving turned into a full-fledged correction in January, when the Federal Reserve hinted it was serious about raising interest rates this year (likely starting in March).
But by and large, interest rate worries will be temporary because the long-term growth narrative surrounding tech is still in force. Three Fool.com contributors think shares of beaten-down Meta Platforms (META -4.13%), Sea (SE -2.20%), and Universal Display (OLED -2.06%) are a buy right now as a result. Here's why.
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The market must have missed Meta's memo on profits
Nicholas Rossolillo (Meta Platforms): By now you probably know all about the market's negative reaction to Facebook's (that is to say, Meta Platforms') ugly conclusion to Q4 2021. The company's value got cut down by one quarter. Revenue growth (up 20% year over year) was closer to the high end of Meta's own expectations issued three months ago, but full-year operating expenses of $71.2 billion were slightly higher than the previously stated outlook. Even more importantly, the Q1 2022 revenue guidance called for year-over-year growth of only 3% to 11%, and full-year 2022 revenue could be impacted by about $10 billion (8.5% of 2021 total revenue) due to effects from Apple's (NASDAQ: AAPL) user privacy updates.
In a nutshell, the long-awaited user opt-out from Apple's IDFA -- which eliminates user-specific data tracking on iOS -- is here. Facebook and other advertising partners won't be able to monetize ads as efficiently as before.
Also, as Meta previously announced last quarter, it's going to be increasing total expenses by a large amount in 2022 in support of its growth initiatives. As much as 34% higher, to be specific, from $71 billion in expenses in 2021 to as much as $95 billion in 2022. It's probably safe to say Meta is going to be dealing with a slowdown in revenue growth and an annual decrease in earnings for the first time since 2019 (when the company had to spend billions to update its security and user privacy capabilities). Apparently the market wasn't getting the hints CEO Mark Zuckerberg and the top team were dropping a few months ago regarding 2022 headwinds.
Nevertheless, the lesson Meta's stock crash teaches isn't "I told you so." It's simply this: Meta is still a long-term growth story. Emphasis on long-term. Apple's user security changes don't spell doom for Facebook and other social apps. Even with the big overhaul to how online advertising is monetized, Meta is still a growth company.
Meta is also spending heavily to develop the next era of computing hardware, its Quest VR headset and marketplace for apps (reported now as Facebook Reality Labs, which by the way, hauled in $2.27 billion in sales in 2021 for a 99% year-over-year increase). Consumer and enterprise computing hardware is an area Facebook has historically had little presence in until as of late, but it has an early lead in VR. That could help it circumvent future disruption from Apple and other tech giants.
It could be a bumpy ride for a while, but Meta's long-term growth story is still very much intact. I'm a buyer after the aggressive haircut the market just gave the stock. At some point down the road, Meta will be back in investors' good graces once again.
This beaten-down stock has the largest growth opportunity I can think of
Billy Duberstein (Sea Limited): I had been recommending Southeast Asian gaming, e-commerce, and fintech company Sea Limited back in December after a large decline. Turns out I was a bit early, as interest rate fears have really caused panic selling in anything that's currently losing money on the bottom line in 2022.
But I still think Sea is a candidate to eventually reach a $1 trillion market cap over time, versus an $85 billion or so market cap today. True, the stock may have gotten a little bit ahead of itself last year, but after a 60%-plus decline from its all-time highs, I think growth investors, especially younger investors without a position, should seriously think about Sea Limited as a long-term investment. Keep in mind, it's impossible to call a bottom in these types of stocks when interest rates are rising.
This time, I'll go through some of the main concerns investors may be having with Sea, including heavy current net losses, the size of its potential market, and its dependence on the success of a single game for most of its profits in Free Fire, the highest-grossing mobile game in Southeast Asia, Latin America, and India.
On negative margins, the main reason Sea is losing so much money -- last quarter it lost $571 million -- is because it is growing its Shopee e-commerce platform extremely quickly. Shopee has quickly leap-frogged established competitors in Southeast Asia to become the leading e-commerce platform, and Sea is expanding Shopee now in Latin America and other new markets across the world.
While management is still aggressively growing Shopee and therefore spending more than it's taking in in revenue, management has also provided color on improving unit margins. On its second-quarter call back in August, management disclosed that EBITDA losses per order declined 20% from the prior year to $0.41 per order, and that EBITDA per order had actually turned positive in Taiwan and Malaysia. The company matched that $0.41 per order loss in Q3 -- not an improvement, but not a setback, either. Management also noted that the loss per order improved quarter over quarter in its core markets of Southeast Asia and Taiwan overall. I'm guessing the increased growth in less mature markets, namely Brazil and other countries in Latin America, is holding back the companywide EBITDA loss figures.
Meanwhile, Sea continues to explore new markets, entering the huge country of India last quarter, and planting its flag in Europe, specifically France, Spain, and Poland. These efforts are also likely to burn cash, but since Shopee has been able to succeed across a diverse array of countries already, it's a pretty good bet that one of these new opportunities could work out. CEO Forrest Li said: "The opportunities we can address through efficiently leveraging the Shopee platform in existing markets and expanding into new markets have increased. We will continue to exercise prudence and maintain flexibility as we pursue the significant growth opportunities with accelerating investments."
Finally, on the dependence on Free Fire, management also pointed to new opportunities in gaming. These include expanding Free Fire with the introduction of Free Fire Max and new Free Fire storylines, new game titles in development, and closer relationships with other game studios. Li continued:
Our growing global presence across diverse high-growth markets gives us important local insights and strong local operational capabilities, and our in-house development team is tapping into this as they work on both existing games and new ideas. Moreover, given our proven global track record, we have received more interest from studios keen to build strategic relationships with us. As such, our pace of investment in and partnerships with game studios worldwide had stepped up.
Basically, Sea is seeing improving unit economics in Shopee, it's expanding to new, large markets, and its gaming unit seems as strong as ever. The company also has a comfortable $11.8 billion in cash on its balance sheet, so it can spend aggressively in the near term without too much worry. Marketwide pullbacks are usually a good time to add to the highest-quality names with big long-term opportunities. Down 60% from highs, Sea looks like such a name.
Invest in the future of ultra high-definition screens while it's down
Anders Bylund (Universal Display): Screen technology developer Universal Display has seen share prices drop 38% lower over the last 52 weeks. I get why the stock is cheap right now, as soft consumer demand for high-end TV sets intersects with a shortage of the display driver microchips that manage the signal flow in Universal's panels.
At the same time, you can almost hear the rocket engines warming up. This little company is going places in the long run.
Organic light-emitting diode (OLED) screens deliver a superior viewing experience with minimal electric power requirements, which adds up to fantastic smartphone and TV screens now. Later, OLED-powered lighting panels should be the next growth driver from a product perspective. Panel manufacturing clients are building out their OLED panel facilities in South Korea, Japan, and China, and the Chinese market holds a particularly strong promise of enormous long-term growth.
Universal Display collects royalties and material sales based on the total square footage of shipped OLED panels. These days, OLED screens are moving into the mainstream on a worldwide scale. You don't want to miss the surge that will come when today's supply chain challenges have been hammered out of the global economy. Top-shelf display systems should also benefit from the metaverse trend, as consumers everywhere invest in virtual reality setups with ultra-detailed screens.
So I see Universal Display's drooping stock chart as a wide-open invitation to pick up more shares at a temporary discount. The market may be slow right now but that setback won't last forever.
