• FAANGM declined 7.7% while the S&P 500 fell 5.9% in January.
• AMZN and NFLX were the laggards, slumping 12.2% and 28.3% respectively.
• We remain OVERWEIGHT on FAANGM. We raised our target prices for Apple, Microsoft and Alphabet after better-than-expected earnings. We modestly trimmed Amazon’s target price as sales slow after a pandemic-induced surge, but remain positive and see easing labour costs as the next share price catalyst. Meta and Netflix, however, face growth headwinds from increasing competition in their respective industries. We have cut their target prices, but they remain a buy after their sharp share price corrections.

Review

FAANGM lagged the S&P 500 in January, falling 7.7% vs the S&P’s decline of 5.9%. AMZN and NFLX were the laggards, slumping 12.2% and 28.3% respectively.

Meta Platforms Inc (FB US, BUY, TP US$312)

• Weak 1Q22 and FY22e guidance. During its 4Q21 earnings call, FB guided weak 1Q22 revenue growth of just 3-11%, impacted by headwinds in both ad impressions and prices. It also expects FY22e total expenditure to rise at least 26% to US$90bn-95bn on the back of increasing CAPEX by at least 56%, as it scales up investments in tech talent and IT infrastructure to better compete with its competitors.
• Reduced effectiveness of targeted advertising due to Apple iOS 14 privacy changes. Apple’s iOS 14 privacy changes continue to affect FB’s core advertising business, decreasing the accuracy of its targeted ads, and making it tougher for advertisers to track and measure the outcomes of these ad campaigns. Advertisers are beginning to reallocate portions of their ad budget away from FB, and towards competitors like GOOGL and AMZN.
• Increasing competition from TikTok and other social media companies. The emergence and growth in popularity of short-form video apps like TikTok continue to be a threat to FB, particularly with its younger users. User growth has begun to slow down, with only 0.3% QoQ for 4Q21. FB began transitioning its own services towards more short-form video like Reels, in an effort to better serve its younger audiences. They have also scaled up hiring in this area, leading to higher total expenses and lowered margins – by almost 10%.

Comments: 4Q21 and FY21 results were in line with expectations. However, guidance was for weaker revenue growth and elevated expenses. FB is hurt by increasing disruptions to its business model from Apple’s iOS 14 privacy changes and increased competition.

Apple Inc (AAPL US, BUY, TP US$214)

• Record quarter for 1Q22 results. iPhone shipments and average selling prices (ASP) exceeded expectations, despite supply chain constraints. Apple also saw record gross margins for both the product and services segments. Despite tough YoY comparisons and headwinds from FX and supply constraints, Apple guided record revenue for the March quarter. The Services segment is expected to continue growing at double digits, driven by the higher installed base. This will help keep gross margins elevated between 42.5-43.5%. Apple also guided supply constraints to ease on a sequential basis.
• More positive data points for iPhone and Mac. In 2021, Apple’s smartphone revenue in Europe grew a strong 25%, according to a report by Counterpoint Research. Apple ended 2021 with 26% of the European smartphone market, up from 22% in 2020. Samsung, which still has the largest market share of smartphones in Europe, ended the year with 32%, with revenue growth rate of just 6% YoY. Meanwhile, Macs revenue grew twice the rate of the PC market in 4Q21, according to a report by Canalys. Apple shipped an estimated 7.8mn Macs in 4Q21, up 9% QoQ, and had 8.5% of the total PC market, up from 7.9% YoY. For FY21, Apple shipped an estimated 29mn units, up 28.3%, compared to the broader PC market which rose 15%. The M1 chip has been a key differentiator for Apple, having elevated Apple’s PC market share from 7.1% to 8.1% since its launch two years ago.
• Potential delay in augmented and virtual reality headset. Apple is weighing a delay of its mixed-reality headset by at least a few months, which could push it into 2023, according to a Bloomberg report. The new device was previously expected to be unveiled at the June Worldwide Developers Conference. Apple is facing hardware development challenges, ranging from overheating to cameras and software.

Comments: 1Q22 results beat expectations and AAPL’s share price spiked after the release in early February. iPhone beat on volume and ASP, so did gross margins for both product and services despite high inflationary pressures. Guidance for 2Q22 was good despite tough comparisons of 54% revenue growth and headwinds from FX and supply constraints. Supply constraints are easing, which bodes well for AAPL’s anticipated widest array of launches in 2022.

Amazon Inc (AMZN US, BUY, TP US$4,079)

• Normalising sales growth guidance. The two one-off positives in 4Q21 were a huge valuation gain from the IPO of Rivian and a 17% price hike for US Amazon Prime memberships. Operationally, the positives were better-than-expected operating margins due to less-than-expected increase in staffing, and a still accelerating Amazon Web Services (AWS), well ahead of expectations. AWS is Amazon’s key growth driver, contributing 75% of FY21 operating income. Sales guidance was weaker than expected though, as growth normalises after a pandemic-induced surge. However, we think FY22 will benefit from easier comparables in FY21 vs the previous comparables in FY20. The swing factor is margins. The eventual easing of elevated fulfilment and labour costs is the positive catalyst.
• Shorter paid leave for COVID-19 positive workers. After reviewing newly released guidance from the Centers for Disease Control and Prevention (CDC), Amazon has confirmed that it is cutting its paid leave from two weeks to a week for workers who test positive for COVID-19 or need to quarantine following exposure. This is expected to narrow productivity losses that have increased Amazon’s costs in recent quarters.

Comments: 4Q21 results were a positive surprise. Excluding one-offs from Rivian and Prime fee hikes, AWS shone with accelerating growth vs expectations of deceleration, and operating margins beat on lower-than-expected labour costs. Growth will normalise after a pandemic-induced surge, but FY22 will benefit from easier comparisons and easing labour and fulfilment costs.

Netflix Inc (NFLX US, BUY, TP US$673)

• Strong revenue growth for 4Q21 with earnings outperforming consensus. NFLX reported 4Q21 revenue growth of 16% YoY, with FY21 growth of 19%, driven by increases in users and prices. US$1.33 EPS for the quarter outperformed estimates by 62%, due to increasing margins and US$104mn FX re-measurement of euro-denominated debt. FY21 EPS grew 85% YoY to US$11.24.
• Weak 1Q22 guidance for paid net additions. NFLX provided weak guidance of 2.5mn net additions for 1Q22 vs 4mn in 1Q21, mentioning a continued overhang from the pandemic, a more back-end slated release schedule for the quarter, and macroeconomic strains in Latin America as user growth headwinds. It also expects a US$1bn revenue loss for FY22e as a result of a strengthening US dollar in relation to most other currencies.
• Heavy interest in NFLX produced series throughout FY21. According to Google, 6 of the top 10 most searched series globally in FY21 were produced by NFLX, with “Squid Game” and “Bridgerton” taking the top 2 spots overall. This validates the company’s continued investments in creating quality viewing content for its subscribers, and showcasing its global reach.

Comments: 4Q21 and FY21 results were in line with expectations. However, guidance was weak for user growth in 1Q22 while a strong USD poses headwinds. We remain positive as NFLX continues to demonstrate strong pricing power for its services.

Alphabet Inc (GOOGL US, BUY, TP US$3,493)

• Solid revenue growth for 4Q21 and FY21. GOOGL posted a 32% YoY revenue growth for 4Q21, supported by both Services, and Cloud growth. FY21 revenue grew 41% YoY to US$257.6bn, significantly higher than its 5-year CAGR of 23%. Cloud continues to be the company’s fastest growing segment, with a 45% YoY growth rate in 4Q21, and a US$51bn order backlog for its cloud services.
• Advertising revenue continues to drive revenue growth. Advertising continues to be GOOGL’s main revenue driver, with a 33% YoY increase for the quarter, and represents 81% of total revenue earned. Ad revenue growth was supported by increasing advertiser spend, and a strong uptick in consumer online activity over the holiday season.
• GOOGL announces 20-for-1 stock split. GOOGL announced a 20-for-1 stock split for its Class A, B, C shares, which is scheduled to occur sometime in 3Q22, subject to shareholders approval. This could make the stock more attractive and accessible to retail traders and investors with a reduced stock price of around US$150, from ~US$3000.

Comments: 4Q21 and FY21 results were in line with expectations. We are bullish on the company’s ability to grow revenue YoY given its wide range of products and global user base. Strong demand for cloud services is expected to continue given its large order backlog.

Microsoft Corp (MSFT US, BUY, TP US$410)

• Firing on all cylinders in 2Q22. Results exceeded expectations. Azure, Microsoft’s cloud business, saw revenue grow 46% YoY vs the consensus growth forecast for 2Q22 of 44% and our FY22e forecast of 41%. Azure is MSFT’s key growth driver, estimated at 45% of MSFT’s gross profit growth.
• Margins were up across the board, driven by demand for premium licenses, improvements in cloud scale, and growth in higher margin Windows operating system and search advertising including from LinkedIn. Guidance for 3Q22 was continued strong momentum in Azure and premium licenses from cybersecurity demand.

Comments: MSFT showed its still in growth stages after the strong 2Q22 results. On top of margin expansions across the board, Azure growth exceeded expectations with customer long-term spending commitments up 37% YoY vs consensus estimates of 11%. This momentum was guided to continue.