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)
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.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
