Summary
For August, FAANGM lagged the overall market for a 3rd consecutive month, losing -1.8%. The S&P 500 and Nasdaq were also down -1.8% and -1.6%, respectively. Overall performance of FAANGM was sluggish, with 4 of the 6 companies recording share price declines. We suspect the weakness in FAANGM could be due to profit-taking post-earnings, and soft consumer demand for AAPL. AI continues to drive activity in Cloud and digital advertising, with companies leveraging AI technology to improve existing, and develop newer more efficient products.
Gainers: AMZN was the biggest gainer (+4%) as it reported operating income that nearly doubled YoY on the back of employee layoffs, efficiency enhancements efforts, and easing transportation costs.
Laggards: META was the main laggard (-7%) likely due to some profit-taking post-earnings after a huge 270% rally from its lows in Nov 22. AAPL was down -5% as it reported a sales decline for the third consecutive quarter due to softness in demand for its electronic devices.
Review
Meta Platforms Inc (META US, ACCUMULATE, TP US$360)
Comment: Meta continues to develop more AI tools for creators to express themselves, although it remains to be seen if any of these tools can be monetised. The stock saw some weakness in August, which we think could be due to some profit-taking after a 3.6x rise in price from the lows in Nov22.
Apple Inc (AAPL US, NEUTRAL, TP US$183)
Comment: The launch of the new iPhone is the most important event of the year for Apple. iPhone 14 sales last year were weaker compared to iPhone 13 sales due to supply constraints, and a stronger US dollar, which was then followed by high inflation that discouraged consumers to upgrade. However, these headwinds seem to have normalised and we expect iPhone sales to return to positive YoY revenue growth (for 1Q24) following the launch. This is also partly due to the rumors of Apple potentially switching to USB-C and the inclusion of a new periscope camera system in the iPhone 15 that allows for a stronger zoom capability.
Amazon.com Inc (AMZN US, BUY, TP US$175)
Comment: We like Amazon’s move to scale back its private-label business as this shows management remains committed to increase operating efficiency. This is because we believe this initiative is similar to Amazon’s previous decision to close some of its unprofitable devices unit. As such, we think we should be able to expect further margin expansion moving forward, following the strong profitability improvements shown in its 2Q23 earnings.
Netflix Inc (NFLX US, NEUTRAL, TP US$446)
Comment: In the near term, Netflix looks to be better insulated from the ongoing writer strikes compared to some of its competitors (Disney, Warner, etc.). One of the main reasons for this is that almost half of its original content is produced outside the US, and is relatively unaffected by the strike. However, we could see further delays and a weaker content slate next year if the strikes continue, which could affect membership addition numbers.
Alphabet Inc (GOOGL US, BUY, TP US$144)
Comment: 2023 still remains the year of efficiency for most companies, evident from GOOGL continuing to look for opportunities to downsize its real estate footprint. GOOGL spent about 12% of its operating expenses on office facilities in FY22. We expect that the lower cost-structure will help GOOGL be more agile and efficient with its future operations, hopefully increasing its operating leverage as well.
Microsoft Corp. (MSFT US, ACCUMULATE, TP US$372)
Comments: The CMA is the last major roadblock to the merger deal closing. Microsoft plans to keep Activision gaming content on rival platforms and not to withhold content. Under the restructured deal, Ubisoft would supply Activision’s gaming content to all cloud gaming providers, including Microsoft. Sony and Microsoft had earlier signed an agreement to keep titles like Call of Duty on PlayStation consoles for the next decade. The merger aims to boost demand for Microsoft’s Xbox consoles and its gaming subscription business. We believe the addition of Activision’s popular titles to Microsoft’s Xbox Game Pass streaming service could boost the number of Game Pass monthly paying subscribers (last reported 25mn in Jan. 2022). Activision’s FY22 revenue of US$7.5bn represents about 4% of Microsoft’s total revenue and is likely to increase Microsoft’s gaming segment revenue by 50%. Microsoft will face a massive breakup fee of US$4.5bn if the merger deal falls apart.
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