Veteran investor warns of tech ‘perfect storm’ as Meta posts historic dive

Veteran stock picker Geoff Wilson warns technology investors should brace for a perfect storm as companies like Facebook face rising costs and flat earnings, after the US-listed company posted a historic share price downswing.

Wall Street saw its largest single day drop on record this week, when shares of Facebook’s parent company, Meta, fell by 26.4 per cent, a stark turnaround for the technology giant that has posted annual share gains since listing in 2012.

Fund manager Geoff Wilson. Credit:Juanita Wilson

The sell-off came after the company reported user growth had slowed as it faces rising competition from Chinese giant TikTok, triggering investor concerns that the US social media behemoth had hit a ceiling in its growth trajectory.

Mr Wilson, chair and chief investment officer of Wilson Asset Management, said the days of “technology stocks going up forever” were over. “Is this the start of a tech wreck?” he said. “We’ve already seen a significant crunching of value in the technology sector. It’s really got to come back to fundamentals.”

Mr Wilson said the technology sector would continue to benefit from digitisation trends, but rising interest rates to curb inflation presented significant headwinds. “The risk is you could have a perfect storm. Which is not positive in terms of broadly, costs going up, while revenues stagnating.”

Perpetual’s head of investment Matt Sherwood said the reining in of fiscal and monetary stimulus globally would give the technology stocks a “price hammering” by taking out “a lot of the tailwinds” the sector has enjoyed for nearly two years.

Mr Sherwood said some technology stock valuations had become so inflated that it would be difficult to see future gains in companies that do not have business plans with strong underlying earnings growth.

“Some very famous names are trading on 30 times earnings and given how developed their businesses are and what a massive market share they have, it’s going to be really, really challenging for those companies to continue to grow profits at a rate that justifies the multiple.”

However, Holon Global Investments research director Tim Davies said his team was preparing to take advantage of Facebook’s sliding share price by buying stock while it’s cheap. Mr Davies said the user growth had slowed because the company has sought to remove “deadwood accounts”.

“It makes numbers and subscribers look less but it’s really just a cleanout with is healthy for their business, rather than customers with accounts that do nothing.”

Mr Davies said he was “super excited” about Facebook’s work in virtual reality and digital payments, which will drive its next phase of growth. “We’re getting to a world where people are sick and tired of staring at the screen.

“I’ve got myself an Oculus [VR] headset … it is game-changing relative to the traditional screen medium we look in. We see massive upside to that.”

Mr Davies said his team was “digesting the impact of TikTok” but added Facebook, which owns Instagram, Whatsapp and other companies, was well positioned to benefit from the ongoing digital trends. “We think it’s a phenomenal company if you look medium to long term.”

However, Bell Asset Management chief investment officer Ned Bell said the market did not have time for “pipe dreams” in an environment of high inflation and rising interest rates.

“They can talk about that as much as they want, but unless it’s going to materialise in earnings, I don’t think the market will give it much credit.”

Mr Bell manages a $3.2 billion global equities portfolio and sold all his Facebook stocks last October after rising concerns about growth and competition from TikTok, as well as governance concerns around the company’s approach to data security.

He said the outlook for technology stocks “feels very familiar to late 2000”, referring to the dotcom bubble where over-valued technology companies crashed. “Anything with no earnings, it’s musical chairs, the music stops and they drop like stones,” Mr Bell said. “You’ve seen that right across the board. They’re pretty savage, some of those falls.”

Wilson Asset Management’s global portfolio manager Nick Healy agreed, claiming TikTok was the first time Facebook has come up against a “proper competitor” that it had not been able to buy or copy. “We haven’t run the ruler at its current price, but the challenges feel more structural than one-off.”

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