Meta Platforms (META): META had an outstanding 4Q23 earnings report and even better guidance for 1Q24.  The company also announced its first ever quarterly dividend and a much larger share buyback.  All the good news was richly rewarded by investors as the shares rose as much as 20% before profit-taking kicked in.  The stock remains 15% higher than just before the earnings release and has reached an all-time high.  We commented in recent quarterly updates about the extraordinary turnaround.  Following a very difficult year, the shares bottomed out at under $90 in November 2022, down from the previous all-time high near $400.  The shares are trading around $460 as I write this update.  Much has been made of CEO Mark Zuckerberg’s commitment to control expenses with 2023’s Year of Efficiency.  However, much more has gone right at META than just expense control.  The company successfully invested to overcome Apple’s privacy changes that crippled the effectiveness of META’s advertising products and services.  Where META deserves high praise was its correct investment choices to regain ad effectiveness through early use of AI internally.  This was before AI became Wall Street’s favorite craze.  META, along with Alphabet, had the scale of users and data to invest heavily and rebuild the effectiveness of digital advertising.  Both companies have gained further market share while advertising demand has improved with a healthier than expected economy.  Management gained further credibility, which translates into valuation support for the stock, by initiating a dividend and upping the share buyback.  Zuckerberg used some of the credulity boost to increase capital expenditures and leave operating expense guidance unchanged.  In the past these things hurt the stock.  Overall, META seems to have improved its competitive position through effective internal investment and built a larger moat in a new AI-driven world of technology.  Earnings estimates for META in 2024 and 2025 moved up sharply after the 4Q23 report.  So much so that despite the huge gain in the shares, the stock is still not unusually expensive.  If new higher estimates for 2025 hold, the shares still have upside well into the $500s without pushing the P-E ratio above the low 20s.  For a company operating as well as META, even after a 15-month move from $90 to $460, the shares remain attractive.

Apple (AAPL): AAPL reported solid results in the December 1Q24 quarter against recently lowered expectations.  Guidance for 2Q24 ending in March was light on revenue but offset by better than projected margins.  AAPL has had a hard time growing the top line over the past year with hardware sales flattening and services growing.  iPhones dominate hardware sales and face slowing upgrade rates and deep penetration in the U.S. and Europe.  Macs and iPads have seen declining sales as they absorb the surge in demand during COVID.  Fortunately, tight cost controls, world-class supply chain management, and commodity price deflation for things like memory chips have allowed hardware margins to move to all-time highs.  Services have much higher margins and have grown in the revenue mix, further boosting margins by several percent above previous company highs.  Add in heavy buybacks thanks to strong cash flow and a steady reduction in the company’s net cash balance and EPS continues to grow above the average U.S. company.  Apple’s superior financial profile and increasingly utility nature of smartphones lead the shares to trade at a high valuation despite minimal top line growth.  We expect the shares to tread water until revenue growth accelerates.  What will lead to accelerating revenue growth?  Renewed strength in China is one factor but the more important development would be a faster pace of phone upgrades.  iPhones need to provide consumers with a step forward rather than incremental improvements in memory, processing speed, and camera quality.  If we had to guess, a built-in AI assistant that requires an upgraded phone, not just a software upgrade, is the best bet.  Management hinted at announcing more clarity about the company’s AI plans later in 2024.  In the meantime, we are comfortable being overweighted Apple in client accounts given the overall quality of the company.  Nonetheless, with less upside, we may trim positions where capital gains are less of an issue.

Disney (DIS): DIS shares are soaring, up 13%, the day after reporting 1Q24 earnings.  To understand why the stock is doing so well, we take you back to what we wrote last quarter.

“it appears that the company’s 4Q23 ending in September represents a pivot to better performance.  Earnings came in ahead of expectations with beats at the segment level across the board…Iger articulated a clear strategy moving forward focused on making streaming profitable, rolling out ESPN as a streaming service, investing in Parks for growth, and getting back to producing the highest quality films.  Confidence in the pivot from fixing and restructuring to growth was supported by a big boost to 2024 free cash flow guidance and reinstatement of a dividend…DIS shares offer a lot of upside if upcoming news and earnings support the four pillars of the new strategy.”

1Q24 delivered in all respects.  Earnings came in ahead of expectations driven by a big beat in operating income.  Streaming losses were the lowest in a long time and way less than expected.  Management affirmed reaching streaming profitability in this year’s fourth fiscal quarter.  A new joint venture was announced for ESPN distribution for this coming fall. An ESPN-only digitally-driven streaming service was announced for fall 2025.  Parks had their highest operating margin ever.  An improved slate of films (on paper) begins this summer and accelerates in 2025.  Last quarter’s surprisingly positive free cash flow guidance was reiterated.  The dividend that was just reinstated last quarter was doubled.  A new share buyback program was initiated.  For the first time we can remember, management guided to year ahead EPS and the figure was well above consensus estimates.  Basically, the news fully supported last quarter’s pivot.  Two caveats are worth noting.  First, Disney is under pressure from multiple activist investors attempting to win board seats.  A cynic would say management manipulated the earnings results and news announcements ahead of April’s annual meeting.  One thing we have learned about investing and life is it is good to be skeptical.  It is bad to be cynical.  Second, as we noted in last quarter’s update, DIS earnings are notoriously lumpy due to the timing of content spending on films, sports rights, and theme park investments and the unpredictability of the box office.  Northlake thinks continued progress on Disney’s four pillars is highly likely in the quarters ahead.  Based on the latest positive news, we think the shares have further near-term upside into the $120s. Continued steady progress offers another big leg up on the stock in 2025 and 2026.  DIS is a beloved company with unique brand value.  Investors will happily drive the shares higher when times are good.  It looks like that time has arrived.

META, AAPL, and DIS are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.