Big Cap Tech and Large Cap Growth Continue to Lead Market Higher

Image Source: Marco Pakoeningrat

By Brian Nelson, CFA

We continue to like the areas of big cap tech and large cap growth as the top firms in these areas have strong cash-based sources of intrinsic value: net cash on the balance sheet and strong expected future free cash flow generation. After the close February 1, the market received the quarterly earnings reports from Meta Platforms (META), Amazon (AMZN), and Apple (AAPL), and we were pleased by the trio’s performance during the calendar fourth quarter. We maintain our long-held view that big cap tech and large cap growth will continue to lead the market higher, and we continue to overweight these areas in the newsletter portfolios.

The biggest upside surprise was Meta Platforms’ fourth-quarter 2023 results. The company beat expectations on both the top and bottom lines, with revenue advancing 25% and income from operations leaping 156% in the quarter. Net income and diluted earnings per share more than tripled in the quarter on a year-over-year basis. Meta Platforms has come back from the depths of despair, and the company has regained its solid footing as a net-cash-rich, free-cash-flow generating, secular growth powerhouse. At the end of 2023, cash and marketable securities were $65.4 billion against a long-term debt load of $18.39 billion, good for a solid net cash position, while the company hauled in an incredible $43.01 billion in free cash flow on the year. Meta also announced a $50 billion increase in its buyback program and even initiated a quarterly dividend of $0.50 per share.

Meta Platforms has largely proven the bears wrong on a number of fronts, with the company 1) overcoming issues that arose with running effective advertising campaigns from Apple’s iOS changes, 2) concerns over the rise of TikTok in short-form video by launching Reels, 3) squashing concerns that Facebook may turn into the next Myspace (its daily [DAUs] and monthly active users [MAUs] continue to expand nicely), and better managing costs and capital spending (headcount fell 22% on a year-over-year basis). Meta Platforms has registered a 10 on the Valuentum Buying Index (the highest rating) on a number of occasions in the past, showcasing its tremendous long-term promise on the basis of our rating system, but we didn’t play the idea as well as we could have in the Best Ideas Newsletter portfolio. The company nonetheless remains a key weighting in most large cap growth indices, and its fourth-quarter results should continue to help drive this area of the market higher.

Amazon reported solid fourth-quarter results after the close February 1, too. Net sales increased 14% in the quarter, while AWS segment sales advanced 13% on a year-over-year basis. Operating income jumped to $13.2 billion in the fourth quarter, up from $2.7 billion in the same period a year ago. Amazon’s North America segment swung to a large operating profit in the period, while AWS segment operating income of $7.2 billion was markedly higher than the $5.2 billion mark in the same period a year ago. Net income in the period was a $1.00 per share, up materially from the $0.03 per share it posted during the fourth quarter of 2022. Looking to the first quarter of 2024, management expects net sales to grow 8%-13% and operating income to come in the range of $8-$12 billion, up materially from the $4.8 billion it posted in the first quarter of 2023.

As with Meta Platforms, Amazon is a net-cash-rich, free cash flow generating, secular growth powerhouse. The company’s free cash flow came in at $36.8 billion on a trailing twelve-month basis, much better than the $11.6 billion outflow for the trailing twelve months ended December 31, 2022. At the end of 2023, Amazon’s cash and marketable securities came in at ~$86.8 billion, while long-term debt was $58.3 billion, good for a solid net cash position. We haven’t included Amazon in the newsletter portfolios in the past due in part to its volatile free cash flow generation (it had a major outflow in 2022, for example), but the firm put up an excellent year hauling in free cash flow during 2023, and its net cash position continues to grow. Amazon is also a key holding in most large cap growth indices, and its strong performance further strengthens the group’s already firm foundation.

Apple’s calendar fourth-quarter report was solid but concerns over sales in China and the momentum behind its Services business cast a cloud over results. Sales from Greater China came in at $20.8 billion in the quarter, but this was much lower than the $23.5 billion that analysts had been expecting. The company’s Services business performed well, but it also came in a bit lower than expectations, despite segment revenue and its installed base of active devices hitting all-time highs. Revenue for its iPhone came in better than expectations in the quarter, so while there may be some profit taking following the quarterly report, Apple’s bread-and-butter iPhone remains in high demand, with all eyes on the company’s launch of the Vision Pro. Apple ended 2023 with cash and marketable securities of $172.6 billion and term debt of $106 billion, good for a solid net cash position, as it hauled in $37.5 billion in free cash flow during the quarter. Though Apple’s results disappointed some investors, we’re sticking with this net-cash-rich, free-cash-flow generating, secular growth powerhouse in the newsletter portfolios.