Just a few months ago, it looked like the Nasdaq Composite was heading for a new bull market.
Tech stocks soared through the first half of the year on enthusiasm for artificial intelligence (AI) and as investors capitalized on the 2022 crash in tech stocks, leading to some rock-bottom valuations in big names.
Fast forward to October and tech stocks are slumping again on concerns about rising interest rates, a possible recession, and signs that the AI boom may be overhyped. As a result, the Nasdaq has sunk into a correction, defined as a decline of 10% from a previous peak.
That pullback has created some attractive buying opportunities for investors, though. In fact, two FAANG stocks look ripe for new buys after their latest earnings reports.
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1. Meta Platforms
Facebook parent Meta Platforms (META 2.24%) plunged through 2022 as investors doubted its pivot to the metaverse and as revenue growth slowed due to broader weakness in the digital ad market. However, the company resolved most of those challenges over the past year, and the stock soared as a result, more than tripling off its lows a year ago.
The company slashed costs with the help of several rounds of layoffs. Its Reels short-video product emerged as a key driver of engagement and it's no longer a headwind on ad monetization. Finally, Meta seems to be leading the recovery in the digital advertising industry as it noted particular strength from e-commerce advertisers and its third-quarter revenue growth easily beat peers like Alphabet and Snap.
Meanwhile, with the help of a 24% decline in its staffing, its operating margin doubled from 20% in the quarter a year ago to 40%, and revenue jumped 23% year over year in the third quarter as well.
While Meta has already surged this year, the stock looks surprisingly affordable at a forward P/E of roughly 20, giving it a similar price to the S&P 500 but with much faster growth.
Reality Labs, its division focused on the metaverse and related products like Ray-Ban smart glasses and Quest mixed-reality headsets, will remain a headwind on total profits, but the company demonstrated the ability to balance that with profit growth in its core advertising business. Additionally, the company should benefit from a broader recovery in the digital ad market.
The stock sold off following its third-quarter earnings report as investors were spooked by comments about volatility in the ad market next year, but it's a mistake to overreact to a dose of cautiousness. Profits are surging and the company looks more in control of its future than it has been in a long time. Like the Nasdaq, Meta stock trades down 10% from its recent peak, and it's a good bet to get back there soon.
2. Netflix
Streaming stocks mostly struggled this year, but Netflix (NFLX 2.40%) made a convincing comeback from its lows a year ago. Like Meta Platforms, Netflix seems to have solved the issues that plagued it earlier and led to two straight quarters of subscriber losses last year.
Netflix rolled out an advertising-based subscription program in less than a year, but what seems to have had the most immediate impact is its crackdown on password sharing, known as paid sharing. Netflix suspects that it has more than 100 million viewers who don't pay for the service, and it's begun informing them that they must pay for the service, have the account they're borrowing from add them as an extra member, or lose access to Netflix.
The gambit appears to be working as the company added nearly 15 million new subscribers over the last two quarters, its best performance since the pandemic and one that came during its seasonally slower period in the warmer half of the year.
Those subscriber gains and the rollout of the ad tier, which starts at just $6.99/month, gave Netflix cover to raise prices on some of its ad-free tiers in the U.S., U.K., and France, which should help boost margins. In fact, the company sees operating margins improving from 20% this year to 22%-23% next year, and the nature of its subscription-based business model means that revenue from incremental subscribers flows through to the bottom line, which should help boost operating margins over time.
Netflix stock popped on its earnings report earlier in October, but the stock is still down nearly 20% from its peak in July. The company expects to deliver around 9 million new subscribers again in the fourth quarter, showing its latest round of growth is far from over.
Investors can take advantage of the pullback as the stock looks likely to move even higher from here.
