Considering the current price drop, is it wise to invest in Meta Platforms and Alphabet, the parent company of Google, given that their shares are now cheaper than Coca-Cola's stock?
Tech giants Meta Platforms (META) and Alphabet (GOOGL/GOOG) slid off their recent highs, with Meta seeing a disappointing quarter and Alphabet dealing with weaker-than-expected YouTube ad revenue last week. Meanwhile, Coca-Cola (KO) hit an all-time high, pushing its price-to-earnings (P/E) ratio to a lofty 26.8, surpassing both tech giants. But why does Coca-Cola deserve a premium valuation over Meta and Alphabet?
Coca-Cola is an exceptional company with a proven track record. Its wide range of beverage brands, including soft drinks, juices, coffee, tea, energy drinks, and sparkling/tonic water, make for a stable and dependable business model. Coke thrives by focusing on its existing brand portfolio and occasionally expanding into new categories. This strategy has proven to be resilient, even in the face of shifting consumer preferences.
Investors are drawn to Coca-Cola's predictable profits, as evidenced by its 62-year streak of increasing dividends. The dividend, currently yielding 2.9%, is an attractive feature for risk-averse investors looking for stability in their portfolio. Coca-Cola, in essence, values its investors' support, making it a reliable choice for both income and growth.
Meta Platforms and Alphabet, on the other hand, are in the midst of a changing media landscape. The two tech giants form a significant portion of the S&P 500's communications sector, with 43% weighting. Their dominance is boosted by the shift towards targeted digital advertising and marketing based on consumer preferences.
However, the internet has brought about dynamic shifts in media. Platforms like Instagram have evolved to capitalize on shorter form video content like Stories and Reels, threatening previous dominance. Moreover, the rise of competitors like TikTok in the social media space and search engines like SearchGPT have increased pressure on Meta and Alphabet's core segments.
These shifts in the landscape necessitate constant innovation, which requires high research and development (R&D) spending. While Meta and Alphabet invest in R&D heavily, their businesses are considered less secure than other tech giants, like Microsoft and Apple, due to the speed at which markets can evolve.
Despite their risks, both Meta and Alphabet are able to adapt to changing trends, innovate, and reward shareholders through free cash flow used for stock repurchases and modest dividends. They also boast strong balance sheets with limited reliance on debt. Both companies offer a balanced combination of growth, value, and income, making them worth considering as investments.
Even so, some may argue that the low valuations of Meta and Alphabet are ill-founded, as they still represent high-growth businesses with strong positions in the market. A more attractive valuation for these tech titans might be more fitting, given their significant advantages and growth prospects.
Given the challenges in the evolving media landscape, investors who are more risk-averse might choose to reconsider their approach towards investing in tech companies like Meta Platforms and Alphabet. Despite their solid financial positions and ability to generate free cash flow, the uncertainty surrounding their future growth potential might lead some investors to seek out safer investment opportunities that offer reliable returns, such as Coca-Cola.
In light of the current market trends, investors might be encouraged to explore different investment strategies that prioritize companies with established business models and predictable financial performance, like Coca-Cola. This shift in approach could result in decreased interest in high-growth tech stocks like Meta Platforms and Alphabet, potentially leading to lower demand and prices for their shares.
