2 Joel Greenblatt Tech Stocks
Joel Greenblatt (Trades, Portfolio) is a legendary investor who is the founder and managing partner of Gotham Asset Management. Greenblatt is best known for his “magic formula” investing strategy, which focuses on buying “good” and “cheap” companies, defined by specific technical criteria, which you can read about in his famous book , “The little book that beats the market”. .”
So, in this article, we’ll look at two tech stock cuts that Greenblatt’s company was buying in Q2 2022 according to its latest 13F report. Let’s dive into it.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They only include an overview of long positions in US-listed stocks and US certificates of deposit at the end of the quarter. They do not include short positions, international non-ADR holdings or other types of securities. However, even this limited repository can provide valuable information.
Micron technology (MU, Financial) is the fourth largest semiconductor company in the world. It’s a title I’ve covered many times before because it’s very popular among big hedge fund managers.
Greenblatt’s company added 39% to its position in Micron in the second quarter of 2022. During the quarter, the shares traded at an average price of $68 each, which is 18% more expensive than where the stock is trading at the time of writing.
Additionally, other major investors such as
Li Lu (Jobs, Portfolio), who is a friend of
Charlie Munger (Businesses, Portfolio), and
Mohnish Pabrai (Trades, Portfolio) also bought Micron recently.
Micron is the third largest supplier of DRAM (dynamic random access memory). If you’ve ever upgraded your laptop’s RAM, you might have seen the Crucial brand, which is also owned by Micron. The company makes 71% of its revenue from DRAM and 26% from NAND (flash memory). The growth of this industry is expected to be driven by the growth of computing, data centers and even 5G. For example, 5G smartphones have 50% more DRAM and 100% more NAND than 4G cellphones. With 5G smartphones increasing in penetration and expected to account for 69% of total shipments by 2023, the company has a huge tailwind.
Micron generated strong financial results for its third quarter of fiscal 2022. Revenue reached $8.64 billion, up 16% year-over-year, which was slightly below company estimates. analysts but still solid overall.
The company also generated a strong operating profit of $3.1 billion, which jumped 33% from the same period last year. Non-GAAP earnings per share were $2.49, which beat analysts’ expectations of $0.15.
Micron issued a poor near-term outlook for semiconductor chips. This was due to a major chip boom during the pandemic, where we actually saw chip shortages in many industries such as automotive. However, the industry is now correcting due to weak consumer markets such as smartphones and PCs. Now, while it’s not great for Micron in the short term, I believe that in the long term the industry trend will be up.
Micron is trading at a forward price-to-earnings ratio of 6.58, 40% cheaper than its five-year average. It is therefore not surprising that this stock is very popular among value investors.
The GF Value line shows a fair value of $82 per share for the stock, making it significantly undervalued at the time of writing.
Meta platforms (META, Financial), formerly known as Facebook, is a global social media giant that owns Facebook, Instagram and WhatsApp. The company’s stock price fell more than 57% from all-time highs after reporting slower user and revenue growth, facing ad revenue issues in light of Apple (AAPL, Financial) privacy updates, suffering a whistleblower report on the company’s lack of care for users of its social media platforms and its bold plans to transform its business for the so-called release 3D of the Internet, the Metaverse.
In the second quarter of 2022, Meta reported revenue of $28.8 billion, down 1% year-over-year and the first-ever revenue decline in history. This was primarily due to a decline in the average price per ad of 14% year over year. This was partly due to Facebook’s focus on Reels in an effort to compete with TikTok, as well as ad buyers pulling spending due to economic uncertainty and recession fears. The good news is that total ad impressions actually grew 15% year over year. Additionally, Facebook’s monthly active users (MAUs) totaled 2.94 billion, up 1% from the prior quarter.
Meta took a hit in operating profit, which fell 34% year-over-year to $8.4 billion. This was due to a substantial increase in operating expenses, which jumped 22% year-over-year to $21 billion.
Founder and CEO Mark Zuckerberg announced strong cost-cutting measures and told employees to “do more with less.”
Earnings per share fell 32% year over year to $2.46. The good news is that management repurchased $5 billion worth of stock while allowing an additional $24.3 billion in buybacks going forward.
Meta has a fortress-like balance sheet with cash, cash equivalents and short-term investments of $40 billion. Meanwhile, total debt is $16 billion, though some of that includes operating liabilities.
Zuckerberg plans to invest some of this large cash balance in the Metaverse. The Metaverse has a lot of potential but remains an unproven concept, but as evidenced by its name change, it’s what Meta is banking its future on.
The stock trades at a price-to-earnings ratio of 16.4, 32% cheaper than its historical five-year average. Additionally, its forward price to free cash flow ratio is 9.1, 58% cheaper than its five-year average.
Greenblatt’s increased its position in Meta by 29% in the second quarter at an average price of $193 per share. At the time of this writing, the stock price is 16% cheaper than the second quarter average price.
The GF Value line shows a fair value for Meta stock of $397 per share, which makes the stock significantly undervalued.
A risk with Meta is that it could be a “value trap” due to declining business fundamentals, such as slow user growth. For example, management expects revenue of between $26 billion and $28.5 billion in the third quarter. That would be well below consensus analyst estimates of $30.7 billion, and down 10% from a year earlier.
Joel Greenblatt (Trades, Portfolio) is a high value investor that focuses on undervalued companies with strong returns and capital returns. Micron and Meta saw their shares post substantial declines, putting them on the radar of many value-oriented investors.
I personally think that Micron offers better upside potential than Meta. Indeed, we know that the semiconductor industry is cyclical and will see a downturn over the next year, but after that the secular trend will eventually pick up. Meta is harder to analyze as slower user growth could be part and parcel of the business given increased competition from competitors like TikTok and the uncertainty of future Metaverse adoption.