These 3 technological stocks are building the future
Businesses don’t magically make profits. First, they must invest in products, services and infrastructure to provide useful goods and/or services to customers. The more useful the product or service, and the more difficult that product or service is to replicate, the more a company and its shareholders benefit.
Today, three well-known tech giants are investing billions of dollars in massive projects that could pay off hugely in the future. However, with the market preoccupied with interest rates and the economy, these stocks are being punished for this spending today.
But for long-term investors, a battered stock with great potential for future earnings is synonymous with “opportunity.”
Amazon is building a massive e-commerce infrastructure
Amazon.co.uk (AMZN -1.40%) sold after its recent earnings report. Revenue was in line with forecasts, but operating profit fell year-over-year as Amazon’s costs soared in its e-commerce business.
Before the pandemic hit, Amazon had invested in its logistics infrastructure to provide free one-day delivery, down from its previous promise of two deliveries for Prime customers. It was a huge undertaking.
Then, when the pandemic hit, Amazon had to increase infrastructure spending to meet all the demand for its regular two-day service. With rising labor and fuel costs, Amazon’s costs and capital expenditures have skyrocketed. Over the next two years, Amazon doubled the size of the distribution network that had taken nearly 30 years to build before COVID-19.
On the first-quarter analyst call, Amazon said it went from undercapacity during the pandemic to overcapacity today as e-commerce demand returned to its prior course. While this puts pressure on margins in the near term, it also means Amazon’s logistics platform is poised to shine. Management said the company was only just getting delivery speeds back to pre-COVID levels.
Now that Amazon has built this huge logistics network, it should have a huge advantage over its rivals. If you can get free delivery to your door within a day, or even the same day, you’ll be even less inclined to visit a store, especially if fuel prices remain this high. This could lead to an increase in sales in the second half.
Additionally, Amazon has just opened up “Buy with Prime” to online merchants outside of Amazon’s platform, allowing independent e-commerce businesses to access its fast and free shipping, payment infrastructure, and services. free returns. Amazon’s delivery network now rivals that of a fedex or UPS — and he can probably undercut their prices, because he’ll be using unused capacity to ship his own goods.
As revenue slows in the first half of the year against tough comparisons, Amazon’s margins are down. However, profits are expected to edge higher when revenues rise again, as Amazon won’t be spending as much. This could happen as early as Prime Day in Q3 or the holiday shopping season in Q4.
Metaplatforms: what’s in a name?
The market also punished Metaplatforms (FB -2.17%), formerly known as Facebook, for a massive project in which it invests billions of dollars every quarter. Late last year, Facebook CEO Mark Zuckerberg announced that the company would change its name to Meta Platforms, while investing billions to build the metaverse, a catch-all term for a new digital world that looks like the real thing.
In combination with the name change, Meta Platforms began streaming results from the metaverse-focused “Reality Labs” segment. This exposure showed that Reality Labs was burning about $3 billion every quarter.
Investors today really don’t want to see companies spending billions of dollars on a futuristic vision with uncertain earnings. During the recent conference call, Zuckerberg said: “[T]it lays the groundwork for what I expect to be a very exciting 2030s when it’s like — when it’s sort of more established as the primary computing platform at this point. I think there will be results along the way for that too. But I think it will be a longer cycle.”
Meta Platforms will release a version of its Horizon metaverse operating system this year, and it will likely monetize more opportunities along the way. Last quarter, Oculus headset sales were $695 million, up 30% from a year ago. Meta is also likely to earn platform fees from sales of digital goods in its metaverse over the next few years.
The company’s ambitions leave me torn. While I think the Metaverse can be a huge opportunity, of these three stocks, Meta Platforms is the most likely to cause disappointment. Will the Metaverse be widely adopted as the “next major computing platform,” as Zuckerberg puts it? Or will it just be a niche app for gamers and tech enthusiasts? At this point, it’s hard to say.
Intel attempts ‘biggest comeback in semiconductor history’
During this time, the market has really deteriorated Intel (INTC -0.67%) during the last years. That’s because Intel made the best and fastest chips in the world, but a few years ago, Taiwan Semiconductor Manufacturing Corp. (TSMC) passed him at the leading edge. This gave Intel’s rivals a chance to overtake “Chipzilla” to produce the most advanced and power-efficient chips on the market.
TSMC does not produce its own chips, but rather acts as a third-party manufacturer for most of the world’s leading chip designers. Under new CEO Pat Gelsinger, Intel is now embarking on an ambitious quest. Not only does the company hope to catch up with TSMC on cutting-edge technology for its own chips, but Gelsinger also wants Intel to become an outsourced foundry to other designers, rivaling TSMC. Given that more and more big tech companies are now designing their own custom chips for specific applications, this makes a lot of sense.
Can Intel get away with it? Again, it’s unclear what the gain will be, but last quarter it already had a $1 billion revenue rate producing chips for third parties. Gelsinger also said on the recent earnings call that the company has hired 10 qualified “pillar customers” to produce chips once it builds its foundries. Intel begins construction of multi-billion dollar manufacturing plants in Arizona and Ohio, and throughout Europe. And it recently launched its foundry ambitions, announcing the purchase of a third-party foundry semiconductor tower for $5.4 billion.
Intel will spend $27 billion on capital expenditures this year and will likely increase those investments over the next few years as it builds a large manufacturing ecosystem outside of Asia, where the bulk of chip production takes place today. The company will need to raise grants from governments to do so, but it looks like the momentum of the legislation will see it through, both in Europe and the US.
If I had to bet, I’d say Intel succeeds, but it’s going to be a very expensive business, and the payoff won’t come for years. Still, it seems Gelsinger and new CFO David Zinsner are convinced: Each bought about $250,000 worth of stock on the open market last week after the market slumped. Intel now trades at just 7.4 times earnings, so if its investments pay off, it could be a huge boon for investors two to three years from now.