• FAANGM was the laggard again in July, up 2.9% compared to the S&P 500’s gain of 3.1%. The Nasdaq outperformed, up 3.8%.
• Digital Advertising companies META and GOOGL were the largest gainers for the month, rising 10% and 11% respectively after issuing better-than-expected forward guidance during their 2Q23 earnings results. The standout here was AMZN’s 90% YoY spike in adj. earnings.
• For 2Q23 earnings, FAANGM stocks on average beat their revenue guidance by 2%, and also saw sharp re-accelerations in adj. earnings growth due to better cost efficiencies, and stronger top line growth. We are starting to see some recovery in digital advertising, and AI-driven Cloud activity, which we believe could be the beginning of a sustained period of margin expansion for most FAANGM stocks. As such, we upgrade our recommendation on FAANGM to OVERWEIGHT.

Summary

For July, FAANGM was up 2.9%, lagging the S&P 500 (3.1%) for a 2^nd consecutive month. The Nasdaq was up 3.8% for the month. We suspect the FAANGM underperformance could be due to FAANGM stocks being negatively affected by the Nasdaq special rebalancing conducted on 17^th July 2023.

Gainers: META and GOOGL were the biggest gainers in July, up 12% and 10% respectively after better-than-expected 2Q23 results and positive forward guidance, with a slight indication that we could expect a recovery in digital advertising sooner rather than later.

Laggards: The rest of the FAANGM (NFLX, AMZN, AAPL, MSFT) had relatively flat performance, ranging from -1% to 3% for July. Note: AAPL and AMZN had yet to announce earnings as of 31^st July 2023.

Results for Quarter ending June 2023

Revenue for FAANGM grew 7% YoY in the quarter, led by META and AMZN. AAPL was the only company that saw contractions in its revenue due to weaker iPhone, Mac, and iPad sales. Other than NFLX, all other companies beat their own company guidance for revenue. Adj. earnings for the FAANGM was very positive, growing 17% YoY on better cost efficiencies and an acceleration in top line growth. Adj. earnings improved 20% YoY sequentially compared with 1Q23. The standout here was AMZN’s 90% YoY spike in adj. earnings due to lower logistics costs.

Review

Meta Platforms Inc (META US, ACCUMULATE, TP US$360)

• Launched Threads, a new short-posting text app. Meta launched its Twitter-rival text app, Threads, and it got off to a very fast start. The app gained ~100mn new users within the first few days of its launch (roughly 40% of Twitter’s daily active users), with most new users coming from Meta’s other platforms like Instagram and Facebook.
• Positive 2Q23 earnings, spike in revenue guidance. Meta issued a set of positive 2Q23 results, with a re-acceleration to double-digit ad growth after 5 quarters, and earnings growth of 21% YoY. The company also issued better-than-expected 3Q23e revenue guidance of 20% YoY growth, indicating a continuation of advertising trends into the back half of FY23e.

Comment: Although still in its early days, the launch of Threads provides an additional avenue for monetization for Meta if it can continue growing its active user base. The downside is fairly limited given its small team size and initial budget for the project. With respect to 2Q23 earnings, most of the growth was led by outbound e-commerce spending from Chinese advertisers. Meta’s short-form product, Reels, also saw improvements, with >200bn daily plays, >75% advertisers using Reels, and a US$10bn annual revenue run-rate. Guidance moving into the back half of FY23e was extremely positive, indicating some early signs of a recovery in digital advertising could be underway.

Apple Inc (AAPL US, NEUTRAL, TP US$183)

• Testing in-house developed generative AI tools. Apple is reportedly working on artificial intelligence (AI) offerings similar to OpenAI’s ChatGPT and Google’s Bard. The company is said to have built its own framework, known as “Ajax”, to create large language models (LLMs) and is also testing a chatbot that some engineers call “Apple GPT”, which is being used internally for product prototyping. Apple does not yet have a concrete plan for the tools it is developing, but it is reportedly aiming to make a significant AI-related announcement next year.
• UK App Store lawsuit. More than 1,500 app developers brought a £785 million (US$1bn) class action lawsuit against Apple over its App Store fees. The developers are criticizing the 15% to 30% commissions that Apple charges app makers for using its in-app payment system, which is also targeted by antitrust regulators in several countries.
• Issued 3Q23 earnings. Revenue was down by 1% YoY, but this was better than guidance of a 2-3% drop. The better-than-expected performance was due to growth in emerging markets with sales records in multiple countries. Greater China sales also recovered to 8% YoY growth from a 3% YoY contraction in 2Q23. Services grew by 8% as customer engagement continues to grow. Apple expects 4Q23 revenue to be down by 1-2% YoY.

Comment: Apple does not talk about AI as much because it remains committed to only reveal new features and products as they come to market. However, the company did note that it has been doing research on various AI tools, including generative AI, for years. With regards to earnings, the results were within our expectations. Apple continues to leverage on its ecosystem strength and its installed base of 2bn devices. Services remain the key growth driver as customer engagement continues to grow, with the number of subscriptions passing the 1bn mark, up from 975mn disclosed in 2Q23, and we believe this will continue to drive margin expansion for the company.