• FAANGM was a slight laggard in June, up 5.6% compared to the Nasdaq and S&P 500’s gain of 6.5%. 1H23 Performance: FAANGM +49%, Nasdaq +39%, S&P 500 +16%. We estimate around half of the gains in the S&P 500 YTD has come from FAANGM stocks.
• NFLX was the biggest gainer, up almost 12% on positive subscriber growth following its password crackdown initiative. GOOGL was the biggest laggard, down -2% for the month with price consolidating at a key resistance point.
• We see most of the stock performance this year a result of multiple expansion due to cost-cutting measures and AI-driven hype, rather than positive earnings revision. We believe near-term weakness in demand for tech consumer goods, digital advertising, and Cloud, still persist. As such, we remain NEUTRAL on FAANGM.

1H23 Performance

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.

Review

Meta Platforms Inc (META US, NEUTRAL, TP US$235)

• Announces Quest 3 VR headset at US$499. Meta’s newest iteration of its VR/MR headset will come with a next-generation Snapdragon chipset from Qualcomm, doubling the current graphics performance of the Quest 2. Prices will start at US$499 for the 128GB headset.
• Introduced generative AI model Voicebox. Meta announced a new generative AI model called Voicebox, a text to speech model that can help with audio editing, sampling, and styling. Voicebox is said to be capable of producing high quality audio clips in several different languages such as English, French, German, and Spanish. The idea is that similar generative AI models could be used to give more natural sounding voices to virtual assistants, or aid visually impaired people in hearing written messages from friends in their own voices.

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)

• Unveiled Vision Pro in WWDC. The headset is Apple’s first major new product in a decade, allowing users to experience virtual reality and apps overlaid on the physical world. It can be used to watch movies or act as a monitor when connected to a Mac by projecting those contents as a massive screen onto the surroundings. Users will control the headset using their eyes, hands, and voice, which is enabled by the sensors and cameras onboard. Vision Pro will have the M2 chip found in Apple’s Macs and also a new chip called R1 for processing data from the cameras, sensors, and microphones. Apple said the headset will cost US$3,499 and will only be available early next year.

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)

• Planning for ad-supported tier for Prime Video. Amazon is discussing alternatives to introduce ads in Prime Video, one of which would be to bring advertising to existing Prime subscribers and give them the option to pay more for an ad-free alternative and other features. The company is said to be making the ad breaks short, but it has not finalized its plans and could decide not to move forward with an ad tier.
• FTC lawsuit on Prime sign-ups. The agency alleged Amazon enrolled customers without consent into Amazon Prime and made it difficult to cancel their subscriptions to the program, saying the company used “manipulative, coercive, and deceptive user interface designs” to dupe users into automatically renewing their subscriptions. The FTC is seeking monetary civil penalties without specifying the amount.

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)

• Spike in new subscribers after password sharing crackdown. According to data from Antenna, average daily sign-ups hit 73k (>2x prior 60-day average) in the period after Netflix announced it would begin its crackdown on password sharing, exceeding the sign-ups observed during the initial pandemic lockdown period. Cancellations also increased, but at a far slower rate than sign-ups, resulting in a big increase to the company’s subscriber base.
• Following writers, Hollywood actors now authorised a potential strike. Similar to the strike by Hollywood writers, the Screen Actors Guild of America have also just authorised a potential strike if an agreement with major studios was not reached by 30^th June 2023. Similar to the demands of the writers, the actors are aiming for higher base compensation, and safeguards around the use of AI. This comes in the wake of several major studios like Disney and Paramount announcing major headcount cuts in an effort to reduce costs.
• Streaming resumes its gains. A May 2023 report by Nielsen showed that streaming’s overall share of TV usage in the US rebounded to 36.4% (2.4% MoM), taking share away from Cable TV (-0.4% MoM to 31.1%) and Broadcast TV (-0.3% MoM to 22.8%). Of the 36.4% streaming share, Netflix remains second with 7.9% (1% MoM), trailing YouTube at 8.5% (0.4% MoM), with Disney+ at 1.8% (flat MoM).

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)

• Looking to move portion of hardware manufacturing to India. Google has started early discussions with several Indian manufacturing companies, in a move similar to Apple, to diversify its manufacturing playbook beyond China amidst US-China trade tensions and worries over supply chain concentration. This coincides with Indian Prime Minister Narendra Modi’s visit to the US – where he was pitching India as an alternative production hub to China, introducing production-linked financial incentives to entice foreign investments.

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)

• Microsoft announced a quarterly dividend payout. On Jun 13, Microsoft declared a quarterly dividend of US$0.68 per share. It’s set to be paid on Sept 14 to shareholders of record as of Aug 17. The ex-dividend date is Aug 16.

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.