The Nasdaq Composite index has gotten off to a solid start in 2023, gaining nearly 9% thanks to cooling inflation and expectations of a pivot by the Federal Reserve, which has been raising interest rates for the past year in a bid to get a handle on the surging inflation.
There are reports that Fed officials may be looking to reduce the pace of rate hikes, a move that could bode well for the stock market that has taken a beating over the past year thanks to the central bank's hawkish stance. Not surprisingly, the Nasdaq has started the year on the front foot, and it could maintain its momentum for the rest of the year if inflation keeps cooling. Additionally, the U.S. economy is expected to avoid a recession in 2023, as per Goldman Sachs, which may add more fuel to the stock market rally.
The Nasdaq's rally has rubbed off positively on shares of Meta Platforms (META -2.28%) and Micron Technology (MU -0.94%), two tech stocks that had a forgettable 2022 amid worsening business conditions. While Meta struggled on account of a sharp slowdown in advertisement revenue and heavy investments in the metaverse that took a toll on its bottom line, Micron was battered by a cyclical downturn in the memory industry.
However, both stocks have taken off sharply in 2023 and are beating the Nasdaq Composite handsomely. While Meta stock is up 22%, Micron has jumped more than 23%. What's more, both stocks are trading at cheap valuations despite their impressive gains. So, should investors take advantage of their cheap multiples and buy them in anticipation of more gains? Let's find out.
1. Meta Platforms
The slowdown in digital ad spending in 2022 weighed heavily on Meta Platforms' stock. According to eMarketer, digital ad spending increased 8.6% in 2022 to $567 billion, following a terrific jump of 29.5% in 2021. This stark drop in advertising spending impacted the company's financial performance last year.
Analysts are estimating Meta's revenue fell 1.6% in 2022 to $116 billion, while earnings are estimated to have shrunk to $9.07 per share from $13.77 per share in 2021. That's not surprising, as 98% of Meta's revenue in the first nine months of 2022 came from the advertising business. However, there are chances of a much stronger performance in 2023 as digital ad spending growth is expected to accelerate to 10.5% this year to $627 billion.
Meta is a key player in this multibillion-dollar space, as its 2022 revenue estimate and the size of the digital advertisement market last year suggest. So, the acceleration in digital ad spending over 2022 and easier comparables to last year tell us why Wall Street is anticipating an improvement in the company's performance.
Analysts are forecasting a 4.5% increase in Meta's top line in 2023 to $121.3 billion. The company's earnings, however, are expected to decline once again to $7.94 per share, though an improvement in this metric is anticipated in 2024, along with a double-digit acceleration in revenue.
META Revenue Estimates for Next Fiscal Year data by YCharts.
More importantly, the digital ad market is expected to clock almost consistent double-digit growth through 2026 and generate nearly $836 billion in annual revenue at the end of the forecast period. This could pave the way for healthy growth at Meta in the long run, given the secular opportunity it is sitting on, as well as a huge user base that should help it attract more advertisers.
After all, there were a whopping 3.71 billion monthly active people using Meta's family of apps -- which include Messenger, Facebook, Instagram, and WhatsApp -- in the third quarter of 2022. What's more, the company continues to attract new users despite having such a massive base already, which was evident from the 4% year-over-year increase in monthly active users during the last reported quarter.
There are chances of a turnaround at Meta Platforms in 2023, which is why investors may want to start accumulating this tech stock right now, as it is trading at just 14 times trailing earnings. That's a nice discount to the five-year average price-to-earnings ratio of 25.4, so investors are getting a good deal on this potential turnaround play.
2. Micron Technology
Micron Technology stock is up in 2023 thanks to the broader Nasdaq rally, as well as potentially favorable developments in the memory industry that could help reduce oversupply and support prices. It is worth noting that the declining sales of smartphones and personal computers (PCs) in 2022 wrecked the memory industry's momentum, leading to weak demand and a supply glut that crushed prices.
Not surprisingly, Micron's fiscal 2023 (which began in September 2022) got off to the worst possible start. The company's fiscal 2023 first-quarter results and second-quarter guidance were woeful. Analysts are predicting a 46% drop in revenue this fiscal year to $16.6 billion. Moreover, Micron is expected to post an adjusted loss of $1.89 per share versus an adjusted profit of $8.35 per share in fiscal 2022.
As expectations are low for Micron in the first half of this year, all that the company needs to do is turn in better-than-expected results to maintain momentum on the stock market. The good part is that the company may be able to do that as it expects customers to start restocking memory chips in the next quarter.
Micron management remarked on the December earnings conference call that it expects "days of inventory (DIO) to peak in our current fiscal Q2 and gradually improve over the next few quarters, as our bit shipments improve and our supply growth is significantly reduced." As a result, the chipmaker sees an improvement in revenue in the second half of the year versus the first half.
That won't be surprising as the PC and smartphone markets are expected to recover in the second half of 2023, leading to an improvement in the demand for memory chips. Additionally, the demand for memory chips in data centers to handle the growth in artificial intelligence applications should unlock another opportunity for Micron to deliver better-than-expected results and sustain its stock market rally.
So, there are chances of Micron stock heading higher in 2023. With the stock trading at just 11 times trailing earnings as compared to the Nasdaq 100's earnings multiple of 25, opportunistic investors may want to buy this semiconductor stock as it could spring a positive surprise in 2023 following a terrible 2022.
