BofA says Meta and Alphabet's cost-cutting measures will boost earnings. Here's why we agree

Published Tue, Oct 4 20223:53 PM EDTUpdated Tue, Oct 4 20224:21 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Meta Platforms (META) and Alphabet (GOOGL) should be able to protect their earnings better than peers in a potential recession, Bank of America analysts argued in a note to clients Tuesday. That's a view we share and one that contributes to our own buy ratings on both Club holdings. What the analysts are saying The note: Bank of America analysts doubled down on their buy calls for Alphabet and Meta, even as they warned of an increased recession risk and a related slowdown in digital advertising in 2023. Both companies generate a majority of their revenue from digital ad sales. "While the outlook for 2023 advertising revenue has deteriorated over the past 6 months, we think negative sentiment and lower valuations make for a more attractive investment backdrop...and we think [earnings-per-share] estimates can hold up better than most stocks in the sector on cost cutting initiatives," the BofA analysts wrote. They added that Alphabet's Performance Max for Google Ads and Meta's efforts to monetize its Reels for Facebook and Instagram could be important revenue drivers for each company next year. Digital ad spending has, in the past, been positively correlated with GDP growth, the analysts explained, making it vulnerable to a downturn in a recession. This is well-understood on Wall Street and has played into the struggles of Google and Meta's shares this year . BofA outlined three potential scenarios for the two tech giants: If Western economies enter a significant recession, Alphabet and Meta could see their ad revenues fall by roughly 6% in 2023. However, if a so-called soft landing takes place and only a mild recession ensues, the analysts believe the Google parent and Instagram parent could keep growing their ad revenues between 4% and 4.5%, respectively. In the bank's third potential scenario, the digital advertising pullback could largely have peaked, in which case Alphabet and Meta could grow ad revenue next year between 8% and 8.5%, respectively. The analysts updated their company-specific models t