Alphabet, Meta Platforms in a recession, Amazon, Uber, Airbnb for risk-on — BofA

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By Sam Boughedda

In a research note Thursday, BofA analysts told investors that Alphabet (NASDAQ:GOOGL) and Meta Platforms Inc (NASDAQ:META) are stocks to own in an average to severe recession scenario, while they also picked out Amazon (NASDAQ:AMZN), Uber (NYSE:UBER), and Airbnb Inc (NASDAQ:ABNB) as stocks for a risk-on trade.

In the note, focused on 2023 and the recession risk, they explained that following the Fed's recent 50bps rate hike, BofA economists remain cautious about the U.S. economy and continue to expect a mild recession starting in 1Q23 with negative U.S. GDP for 2023.

In addition, the analysts said: "BofA strategists prefer quality, income and small caps to growth stocks going into 2023. These views are cautious for our Internet coverage group, though stocks are down 52% on average YTD (vs S&P at 17%), and valuations vs history (sales, EBITDA, PE) suggest that the sector may already be discounting more estimates downside."

In an average to severe recession scenario, Alphabet and meta are the companies named by the analysts, who said, "these stocks have more valuation support vs history."

"While revenue estimate cuts for advertising stocks are very likely in a recession scenario, we would anticipate accelerating cost cutting activity in 2023 to result in smaller EPS cuts vs peers. Looking back at the 2008-2009 recession, Alphabet's revenue growth missed expectations and slowed to 5% in 2Q'09, however, OpEx fell y/y, EBITDA margins grew 5 points y/y, and EPS was up 16%. Meta has recently announced a large layoff, and seems more likely to cut spending now vs earlier in 2022," they said.

In a risk-on environment, which they do not expect in the first half of 2023, they stated: "For an eventual risk on trade, we prefer share gainers with perceived margin leverage, which outperformed after the Nov. 2008 sector bottom. For a risk-on trade, our top share gainers include: 1) Amazon will gain share in eCommerce and grow margins following massive fulfilment investment, 2) Uber is growing share in mobility and will see margin improvement from greater network efficiencies, and 3) Airbnb will have strongest multi-year growth in travel with high gross margins driving leverage on opex."