• FAANGM was down 1.6% in February, beating the S&P 500’s decline of 2.6%. Nasdaq outperformed, a decline of only 0.5%.
• META was the main outperformer, up 16% as it remained committed to reducing costs moving forward. GOOGL was the biggest laggard, down 10% due to weaker digital advertising trends, which are expected to continue.
• Weakness in digital advertising, consumer tech demand, and pullbacks in Cloud spending continue to weigh on revenue expectations for FAANGM LTM P/S. FY23e revenue growth for FAANGM is expected to be in the mid-high single digits (roughly half its 5-year CAGR of 15%). We remain NEUTRAL on FAANGM.

Review

Meta Platforms Inc (META US, NEUTRAL, TP US$200)

• Offering a new monthly subscription service. Meta is set to roll out a new monthly subscription service, called Meta Verified, which will allow the user to verify their accounts using a government ID. The subscription bundle for Facebook and Instagram is mainly aimed at enabling content creators to expand their communities in a safer way. The subscriptions will start at US$11.99/month on web, and US$14.99/month on iOS and Android.

Comment: Meta’s new subscription service should bring about incremental revenue for the company given its wide base of content creators. This additional stream of revenue should also be welcomed by investors given the company’s revenue contraction over the last 3 quarters as digital advertising demand continues to wane.

Apple Inc (AAPL US, BUY, TP US$186)

• iPhone price cut in China. Major retailers in China, including e-commerce site JD.com and Sunin, slashed prices of iPhone 14 Pro and 14 Pro Max by 800 yuan (US$125). Apple rarely lets third-party retailers offer such discounts on its products and the prices on Apple’s official China website remained unchanged. The price cuts came after iPhone shipments to China fell by 4% in 2022.

Comment: Although there was no official statement by Apple regarding the price cuts, we believe the discounts were a part of Apple’s efforts to boost consumer demand following the 7% YoY China revenue decline in 1Q23 and to clear excess inventory. This means that the demand in China was generally weaker than expected and the sales decline was not entirely due to supply disruptions. However, we still think Apple enjoys strong customer loyalty and that it could recapture some of the potentially lost sales in the subsequent quarters.

Amazon Inc (AMZN US, ACCUMULATE, TP US$117)

• Completed US$3.9bn acquisition of 1Life Healthcare. The deal was closed one day after the FTC said it would not block the deal, but the agency said the investigation on the merger would continue. The acquisition gives Amazon access to dozens of medical offices in more than 20 US markets, as well as deals with thousands of companies to provide employee health benefits.
• Cut ties with EU distributors. Amazon is planning to source products for its European stores directly from brand owners instead of going through a middleman, i.e. distributors. The company will hold off implementing the change until April. Sourcing directly from brand owners could potentially improve Amazon’s profit margin as it eliminates the cuts taken by the distributors.

Comment: We believe the success and the benefits of the merger with 1Life Healthcare is yet to be seen as Amazon will face competition from major players like CVS, which had also made its own acquisition for expansion. Amazon was also greeted with difficulties in its previous healthcare ventures which led to the closure of its Amazon Care and Haven in 2021, a joint venture between the company, Berkshire Hathaway, and JPMorgan. On the other hand, we like Amazon’s move to source products directly from manufacturers in Europe. Europe is Amazon’s second largest market and therefore, we think such an initiative should meaningfully improve the company’s margins.

Netflix Inc (NFLX US, ACCUMULATE, TP US$388)

• Finally cracking down on password sharing. Netflix has laid out some new policies regarding password sharing, in its attempt to block subscribers sharing passwords outside a single household. Netflix will now require members to set a primary location for the account, and utilise OTPs to give restricted access to members who are using the account outside of its primary location. The company estimated that around 100mn (~43% of total subscribers) share passwords with others who do not pay for the service.
• Streaming continues to stay in front. A January 2023 report by Nielsen showed that streaming’s overall share of TV usage in the US was flat MoM at 38.1%. Cable TV declined for the 5^th straight month by -0.5% to 30.4%, with Broadcast TV up slightly -0.2% MoM to 24.9%. Of the 38.1% streaming share, Netflix remains second with 7.5% (flat MoM), trailing YouTube at 8.6% (-0.1% MoM), with Disney+ at 1.7% (-0.2% MoM).

Comment: Netflix has finally implemented its crackdown on password sharing after talking about it for 2 quarters. However, we do expect the indirect revenue gained (from password sharers subscribing to their own plans) to be fairly limited in the early stages given the discretionary nature of the entertainment business, although the potential revenue earned from this crackdown could reach US$14bn annually.

Alphabet Inc (GOOGL US, BUY, TP US$131)

• Partnering with Mercedes-Benz to develop an advanced nagivation system. Alphabet announced a new partnership with car manufacturer Mercedes-Benz to build an in-car data and navigation system. The system will utilise Alphabet’s Google Maps Platform to provide real-time predictive information in addition to its usual navigation features. Mercedes also plans on leveraging Alphabet’s Cloud and YouTube platforms to deliver better user experiences for drivers.

Comment: We are positive on Alphabet’s partnership with Mercedes on 2 fronts: 1) it demonstrates the company’s ability to gain revenue from corporates outside of digital advertising, reducing the reliance on a single revenue segment; 2) it shows that the company’s investments in Cloud and AI complement each other in producing better products for end-users.

Microsoft Corp. (MSFT US, BUY, TP US$298)

Comments: Cloud is the major growth driver for Microsoft given the momentum of digital transformation and the subsequent push to cloud adoption by companies. In 2Q23, Azure revenue jumped by 38% YoY in constant currency, but this is expected to decelerate to 30% YoY growth rate in 3Q23e as large customers pause their spending amid the economic slowdown. Near-term personal computer demand is still expected to remain weak, with 3Q23e Windows OEM revenue expected to decline in the mid-to-high 30% range.