Technology stocks have seen better days. The sector is experiencing heightened volatility and falling out of favor with investors looking for safer bets. That's creating an opportunity for long-term investors willing to weather the storm in the near term to pluck excellent businesses at bargain prices.
Two top tech stocks, in particular, are ready for a bull run. Meta Platforms (META 1.28%) and Alphabet (GOOGL 0.58%) (GOOG 0.41%) are the two dominant companies in a massive and growing advertising industry. They are also trading at inexpensive valuations according to widely used metrics. Let's look closer at each.
As you might already know, Meta Platforms was formerly known as Facebook. The company changed its name to emphasize its changing focus on becoming a metaverse-first business. While that may be an exciting transition and provide benefits long down the line, it's not the primary reason Meta is ready for a bull run. Instead, it's the more than 2.8 billion daily active users that log on to its family of apps, including Facebook, Instagram, WhatsApp, and Messenger. No other social media company boasts that kind of scale.
That's vital because Facebook's family of apps are free to join and use. Meta makes money by showing advertisements to those opening and interacting with the apps. Liking a picture, commenting on a post, and tagging friends are all examples of how folks get value from the services. The aforementioned are also actionable data Meta Platforms can use to sell targeted advertising. Wouldn't the local restaurant love to advertise to the friend who liked another friend's photo of a meal from the restaurant?
Indeed, small and large businesses alike have found great value in advertising with Meta Platforms. That can explain how revenue has grown from $18 billion to $118 billion from 2015 to 2021. Its business model lends itself well to efficiencies of scale, and operating income rose by more than $40 billion in that same time.
Nevertheless, Meta is facing a few headwinds in the near term that are expected to decelerate revenue growth. The slowdown is spooking investors, and the stock is down 42% off its high. Meta Platforms is now trading at a price-to-earnings ratio of 16 and a price-to-free cash flow ratio of 16. According to the metrics, those are almost the cheapest valuations it has sold for in the last five years.
Alphabet is home to some of the most popular digital services the world has ever seen. Google is by far the most dominant search engine, and YouTube attracts the attention of 2.2 billion users globally. Like Meta, Alphabet generates most of its revenue from advertisers. Therefore, it's a great advantage that most people on the planet start their internet searches on Google.
Businesses can pay Alphabet for sponsored ads that show up on search results. For instance, sellers of sunscreen can place an ad shown to users who search for "closest lake near me." This type of advertising delivers a better return on investment than a commercial shown to a broad TV audience. The greater efficiency can partly explain why digital advertising is growing to take a larger share of the $763 billion global advertising industry. This trend has undoubtedly boosted Alphabet from $75 billion in revenue in 2015 to $258 billion in 2021. This business is lucrative for Alphabet just like it is for Meta, with operating income rising from $19 billion to $79 billion in that same time.
Alphabet is also inexpensive, selling at a price-to-earnings and price-to-free cash flow ratio of 24 and 28, respectively.
Inexpensive valuations, booming profits, and dominant businesses are why Alphabet and Meta Platforms are two tech stocks ready for a bull run.