FAANGM was up 49% in 1H23, its best half over the last 10 years, more than double its previous high in the period (24% in FY20), and more than 3.5 times its 10-year average of 13%. We believe most of the gains this year have been driven by 2 factors: 1) cost-cutting initiatives aimed at margin expansion over the long run; 2) AI-driven hype expected to boost productivity and revenue growth for FAANGM.
Surprisingly, FY23e earnings forecasts for FAANGM stocks have actually remained relatively unchanged (aside from Meta), and share price performance seems largely a result of a multiple expansion due to the 2 factors listed above – FAANGM Forward P/E has increased from 24x to 33x this year. On the macro front, the current environment still seems fairly uncertain – interest rates remain high, and we still see near-term weakness in demand for tech goods like smartphones and personal computers, digital advertising, as well as moderating Cloud spending.
Meta Platforms Inc (META US, NEUTRAL, TP US$235)
Comment: The introduction of Voicebox comes in line with the company’s continued investments into generative AI, although it remains to be seen how certain AI products can be monetized. The constant evolution and improvements of its Quest headsets is also indicative of Meta’s goal to still focus on the Metaverse as an immersive way of social and gaming interactions. Quest headset sales have been quite encouraging, with almost 20mn units sold so far – although the business segment is still burning through cash with its timeline to profitability still in question.
Apple Inc (AAPL US, NEUTRAL, TP US$183)
Comment: We believe Vision Pro will not have a significant revenue contribution in FY24e. This is because we think there will only be a small, limited number of customers who are willing to purchase the device given the high price tag. Furthermore, we also believe instead of being a revenue growth driver, the launch is intended to establish a stronger supply chain and pool of developers to enhance the user experience for the subsequent generations of the product.
Amazon.com Inc (AMZN US, NEUTRAL, TP US$120)
Comment: Amazon’s plan to include an ad-supported tier is similar to the moves made by Netflix and Disney recently and we believe this should provide a further margin expansion opportunity for its retail segment, given the high-margin nature of advertising business. We think there will also be high interest from advertisers for such offering as Amazon’s advertising business continued to experience strong growth over the last few quarters, while competitors experience moderation/decline. Separately, we think the FTC lawsuit will not have a significant impact on the company’s financials in the near-term as such cases can take years before a verdict is reached.
Netflix Inc (NFLX US, NEUTRAL, TP US$388)
Comment: Given the upbeat early reports from some of Netflix’s recent initiatives, it would be interesting to see subscriber and revenue numbers when the company does its quarterly earnings call later this month. We do think that we could also see some margin expansion due to the progress of Netflix’s 2 newest initiatives (crackdown on password sharing and ad-supported subscription service).
Alphabet Inc (GOOGL US, BUY, TP US$131)
Comment: We like the idea of manufacturing diversification into India, especially after major supply chain disruptions in China due to pandemic lockdowns. Additionally, this would be an added advantage if the company hopes to grow its market share of Pixel products in one of the world’s largest markets. Even though hardware sales currently make up a very small proportion of total revenue for Alphabet, we do expect it to grow quickly given the improvements in hardware tech and the increasing popularity of Pixel products on the market.
Microsoft Corp. (MSFT US, NEUTRAL, TP US$328)
Comments: For 4Q23e, Microsoft projects Azure cloud revenue growth of about 27% YoY in constant currency while Office 365 commercial revenue is expected to grow by 16% YoY. Meanwhile, Windows OEM revenue is anticipated to fall in the low-to-mid 20% range due to weakening consumer demand for PCs. We downgrade to NEUTRAL from ACCUMULATE due to the recent share price performance.