No one can confidently claim to know whether we are currently in a bull market or not -- only time shall tell. However, improving macroeconomic indicators are hinting at a potential bull market surge in the coming months.
According to the preliminary data from the Bureau of Economic Analysis, the U.S. real gross domestic product (real GDP, a measure of inflation-adjusted economic activity) was up at an annual rate of 4.9% in the third quarter (ending Sep. 30, 2023), better than the 4.7% estimate. Additionally, according to the Labor Department's Bureau of Labor Statistics (BLS), the consumer price index (CPI, a metric of inflation) rose year over year by 3.2% for twelve months ending October 2023, slower than the 3.7% rise seen for the 12 months ending September 2023. The cooling inflation hints at a possible end to the Federal Reserve's interest rate hike cycle, which bodes well for the health of the stock market.
Against the backdrop of improving macros, we can expect a significant recovery in ad spending -- which in turn could be beneficial for technology stocks such as Meta Platforms (META 0.43%) and Roku (ROKU -10.29%). Here's why these stocks are attractive picks in the current market environment.
Meta Platforms
After a disastrous performance in 2022, Meta Platforms made a major comeback in 2023, with shares rising by nearly 182.5% so far this year.
Meta has reported stellar performance in the third quarter (ending Sep. 30, 2023), with both revenue and earnings handily surpassing consensus estimates. This has been driven by the strong performance of its advertising business, recorded under the "Family of Apps" business segment (which includes revenue earned from social media platforms such as Facebook, WhatsApp, Instagram, Messenger, and Threads). Meta also posted an operating margin of 40% in the third quarter, a dramatic year-over-year improvement of 20 percentage points.
In the third quarter, the daily active users of Meta's "Family of Apps" grew by 7.2% year-over-year to 3.14 billion. With a user base accounting for nearly 40% of the global population, Meta continues to see increased interest from the advertiser community. Meta is also leveraging artificial intelligence (AI) to strengthen all of its business offerings--improving ad targeting, content discovery, user engagement, and monetization.
Meta is also focusing on developing new revenue streams. Although a headwind in 2022, Reels has already become revenue-neutral in 2023, and is expected to become a modest tailwind in 2024. The company is also working on monetizing its 200-million-strong user base on WhatsApp Business. The company's Click-to-WhatsApp ads (allowing customers to connect directly with businesses through WhatsApp) have already reached a multi-billion dollar annual run rate. The company is further working to reduce dependence on advertising by creating a new revenue stream through paid business messaging by merchants on the Messenger and WhatsApp platforms.
There is no question that Meta's investments in areas such as mixed and augmented reality and the metaverse have proved to be a drag for the company, and have been hurting overall investor sentiment. However, despite these challenges, thanks to a strong core advertising business, new evolving revenue streams, and robust AI initiatives, Meta could prove to be a smart pick in the event of an upcoming bull surge.
Roku
Roku, the most popular streaming platform in North America with a 53% market share, came out with blowout results in the third quarter. Revenue and earnings surpassed both the company's own guidance and consensus estimates. The company has reported positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first time since early 2022. These numbers are impressive considering that ad spending (the main source of Roku's revenue) has been negatively affected in the current uncertain macroeconomic environment.
The accelerated pace of cord-cutting (the shift of viewers and advertisers from linear television to streaming media) continues to be the key growth driver for Roku. According to Leichtman Research Group, the largest pay-TV providers in the U.S. lost 465,000 net subscribers -- significantly higher than the 385,000 net subscribers lost in the same period of the prior year. With many of these viewers opting to purchase either Roku devices and/or devices with Roku's smart TV operating system for streaming entertainment, the company saw a 16% year-over-year jump to 75.8 million active accounts in the third quarter. Streaming hours on the Roku operating system also grew year-over-year by 22% to 26.7 billion hours.
Although more popular for its streaming hardware devices, Roku earns most of its total revenue (85% in the third quarter) from the platform segment (which is predominantly advertising revenue). The company earns money from its streaming partners in two ways: as a percentage of the subscription fees paid by users, and 30% of the ad inventory for ad-supported channels. As a leading smart TV operating system and a major streaming content aggregator, Roku has been leveraging AI to improve content discovery and ad targeting across streaming channels. This helps attract even more streaming partners and advertisers to its platform, which further brings in more revenue for the company. Furthermore, the company's free ad-supported Roku Channel (which streams Roku's original content) is playing a major role in user engagement and user lock-in.
Considering the solid tailwinds in the streaming sector and Roku's brand strength and presence, the company seems well-positioned to prove to be a solid turnaround story in the coming months.
