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BofA says Meta and Alphabet’s cost-cutting measures will boost earnings. Here’s why we agree

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Meta Platforms (META) and Alphabet (GOOGL) should be able to protect their earnings better than peers in a potential recession, Bank of America analysts argued in a note to clients Tuesday. That’s a view we share and one that contributes to our own buy ratings on both Club holdings. What the analysts are saying The note: Bank of America analysts doubled down on their buy calls for Alphabet and Meta, even as they warned of an increased recession risk and a related slowdown in digital advertising in 2023. Both companies generate a majority of their revenue from digital ad sales. “While the outlook for 2023 advertising revenue has deteriorated over the past 6 months, we think negative sentiment and lower valuations make for a more attractive investment backdrop…and we think [earnings-per-share] estimates can hold up better than most stocks in the sector on cost cutting initiatives,” the BofA analysts wrote. They added that Alphabet’s Performance Max for Google Ads and Meta’s efforts to monetize its Reels for Facebook and Instagram could be important revenue drivers for each company next year. Digital ad spending has, in the past, been positively correlated with GDP growth, the analysts explained, making it vulnerable to a downturn in a recession. This is well-understood on Wall Street and has played into the struggles of Google and Meta’s shares this year . BofA outlined three potential scenarios for the two tech giants: If Western economies enter a significant recession, Alphabet and Meta could see their ad revenues fall by roughly 6% in 2023. However, if a so-called soft landing takes place and only a mild recession ensues, the analysts believe the Google parent and Instagram parent could keep growing their ad revenues between 4% and 4.5%, respectively. In the bank’s third potential scenario, the digital advertising pullback could largely have peaked, in which case Alphabet and Meta could grow ad revenue next year between 8% and 8.5%, respectively. The analysts updated their company-specific models to include more conservative forecasts given the bank is predicting a recession in the first half of 2023. The bank also lowered its price targets for both companies. For Meta, it’s now $196 per share, down from $218. For Alphabet, it’s $114 a share, down from $125. In Tuesday afternoon trading, Meta’s shares were up more than 1%, at $140 a share. Alphabet was up around 2.8%, at $101.42 a share. The analysts, nonetheless, continue to see Meta and Alphabet worth owning here because earnings can remain resilient compared to peers. “Alphabet and Meta have increased total expenses by over $50 billion from 2020, and we think there is a lot of room to cut costs (on top of positive FX impact on expenses),” they wrote. The Club’s take As concerns about the global economy have intensified in recent months, we’ve been glad to see both Meta and Alphabet take steps to tighten their corporate belts, including through hiring slowdowns and an emphasis on productivity . We’re especially encouraged by these efforts at Meta. Recent reports suggest the company may soon go further and reduce its headcount for the first time in its nearly two-decade history. It’s also reportedly closing one of its offices in New York City. While we’re acutely aware of the risks presented by a digital ad slowdown, the companies cannot change the near-term course of the global economy themselves. What they can control is their own expenses to help minimize any pressure on revenues. To that end, we think management teams at both Meta and Alphabet are being very prudent, as these actions can help establish a floor for earnings in the face of top-line headwinds. It’s partly why we maintain 1 ratings on the stocks, meaning we’d be buyers here, despite the overall challenging environment for tech. We also agree with Bank of America on Meta’s Reels monetization efforts. Meta has indicated that Reels — its short-form video feature meant to combat the rise of TikTok — has seen strong adoption. We think that will continue to be a more meaningful contributor to revenue in the coming quarters, even though it currently remains a headwind. (Jim Cramer’s Charitable Trust is long GOOGL and META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Expectations were already low going into Meta’s latest quarterly results, which were a mixed back.
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Meta Platforms (META) and Alphabet (GOOGL) should be able to protect their earnings better than peers in a potential recession, Bank of America analysts argued in a note to clients Tuesday. That’s a view we share and one that contributes to our own buy ratings on both Club holdings.

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