Summary
For October, FAANGM outperformed the broader market, gaining +1.6% on better-than-expected 3Q earnings results, while the S&P 500 and the Nasdaq both declined -2.2% and -2.1%, respectively.
Gainers: NFLX (+7.7%) and MSFT (+7.1%) were the biggest gainers for October after both companies beat consensus estimates for revenue and earnings.
Laggards: GOOGL (-5.8%) was the biggest loser on disappointing Cloud growth.
Earnings: Overall revenue growth continued to accelerate slightly (3Q23: 8.1% YoY vs 2Q23: 6.8% YoY), boosted by a recovery in the digital advertising industry, and resilient e-commerce demand. The highlight was earnings growth, which accelerated significantly to 45% YoY, ~3x vs 2Q23, as most FAANGM companies began to feel the full effects of their cost optimisation efforts. 4Q23e guidance for META, AMZN, NFLX, and MSFT were all very encouraging, implying 10-20% revenue growth expectations. Growth for AAPL is expected to remain flat YoY due to continued cyclical weakness for tech hardware (other than iPhone).
Review
Meta Platforms Inc (META US, BUY, TP US$375)
Comment: With a recovery in the digital ad market underway, we believe that companies like Meta are well positioned to reap all the benefits due to its substantial reach and improving targeted ad performance. In addition, Reels monetisation is no longer a headwind to revenue growth, and is expected to be a slight tailwind moving into FY24e. The only knock would be Meta’s guidance of increasing total expenses for FY24e which should be a slight drag on margin expansion. We upgrade to a BUY rating from ACCUMULATE, with a raised target price of US$375 (prev. US$360).
Apple Inc (AAPL US, ACCUMULATE, TP US$194)
Comment: Moving forward, we believe that overall growth will mainly come from Apple’s Services segment as its installed-base increases. This will also be tailwind for margins as Services margin is double that of Product. The key markets for iPhone growth remains India and China, although we do not expect significant iPhone revenue growth as increases in ASPs are unlikely due to product mix. We upgrade to an ACCUMULATE rating from NEUTRAL, with a raised target price of US$194 (prev. US$183).
Amazon.com Inc (AMZN US, BUY, TP US$190)
Comment: AMZN benefitted from resilient consumer retail spending in 3Q23. In addition, efforts in regionalizing its fulfillment network seems to be paying off, with lowered cost to serve and delivery times as a result. We expect future margin expansion to come from growth in higher-margin AWS and advertising – which we see as a huge opportunity for AMZN given it is still only ~8% of total revenue.
Netflix Inc (NFLX US, ACCUMULATE, TP US$455)
Comment: Paid membership additions were the highlight of Netflix’s results, with the company adding the highest number of members since the middle of the pandemic. A large portion of these new additions came from converting password borrowers into paying members as Netflix continues to crack down on password sharers/borrowers. This effect is expected to continue for several more quarters, and when coupled with price hikes, should give overall revenue growth a boost in the near-term. We upgrade to an ACCUMULATE rating from NEUTRAL, with a raised target price of US$455 (prev. US$446).
Alphabet Inc (GOOGL US, BUY, TP US$144)
Comment: Alphabet’s earnings were actually pretty good across the board. As the main beneficiary from a recovery in the digital ad market, the company should also expect revenue tailwinds moving forward. Margins should also expand as a result given Alphabet’s lower cost base. The main concern for this quarter was decelerating Cloud growth (+22% YoY) which came in below expectations, and was also an indication of Google Cloud losing ground to Azure (MSFT) and AWS (AMZN).
Microsoft Corp. (MSFT US, ACCUMULATE, TP US$375)
Comments: Microsoft expects 2Q24e total revenue to grow 15% YoY to US$60.9bn driven by strong Azure revenue growth of 26% to 27% YoY on a constant currency basis. Office 365 commercial revenue to grow 16% YoY again led by user growth and higher revenue per user due to E5 momentum. While Office 365 Copilot AI tools commercially launched on Nov. 1, management expects the related revenue to grow gradually over time. Gaming revenue is expected to grow in the mid-to-high 40% range, with roughly 35 percentage points of contribution from the Activision Blizzard deal. For FY24e, operating margins are expected to remain flat at 42% vs FY23 after factoring in both revenue and expenses associated with the Activision deal.
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