FAANGM Monthly – Mar 22

Regulatory risk increases

UNITED STATES | TECHNOLOGY | UPDATE

·       The FAANGM gained 5.9% while the S&P 500 gained 5.2% in March. NFLX continued to underperform, declining 3% in the month, largely due to a continued negative effect from poor 4Q21 earnings. Meta was the outperformer, gaining 9.3%.

·       The highlight for the month was the agreement over a newly created Digital Markets Act in the EU, mainly targeting monopolistic practices of “gatekeeper” large tech companies, in particular the FAANG stocks.

·       We remain OVERWEIGHT on FAANGM. On the hardware side, the easing of supply chain and labour shortages should continue to benefit AAPL and AMZN. For software, we expect corporate demand for MSFT’s higher-end licenses to continue as concerns over increased cybersecurity linger. As for the internet, we like GOOGL’s robust M&A activity as it invests more in its capabilities for the metaverse.

Review

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

–          Plans to build out 1 mn sqft data centre in Kansas City. The facility will cost more than US$800mn to build and is pursuing sustainability via LEED gold certification. It would be Meta’s 16^th data centre within the US, and its 21^st globally. This is in line with company guidance for FY22e CAPEX of US$29-34bn, to further its capabilities for the metaverse, and to better compete with other social media companies.

Comment: Investing in new data centres is definitely in line with the company’s strategy for this year. These investments should pay off in the long run as Meta competes for a position in the social media/digital advertising space.

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

–          New iPhone and iPad subscription service in the pipeline. According to a report from Bloomberg, Apple plans to let users buy iPhone and iPad hardware by paying a monthly subscription fee. The monthly fee will depend on which device the user chooses. The new service may be launched later this year. Apple may allow users of the program to swap out their devices for new models when fresh hardware comes out. Apple historically releases new versions of the iPhone, iPad and Apple Watch once a year. This is Apple’s big push to a more recurrent revenue model.

–          More worry on regulations. The American Innovation and Choice Online Act received the Department of Justice’s backing, increasing the chances of it being passed. In the EU, European lawmakers reached an agreement on the Digital Markets Act, setting the stage for it to go into effect next year. The regulations, if passed, will allow developers to make their apps available to iPhone users without going through Apple’s App Store, which contributed an estimated 15% of PATMI in FY20. Apple may even be barred from pre-installing its apps on iPhones.

–          TSMC warns of slowing smartphone demand. Demand for consumer electronics like smartphones and PCs is slowing due to continued geopolitical uncertainties and new lockdowns in China, according to TSMC Chairman Mark Liu. TSMC, or Taiwan Semiconductor Manufacturing Company, is one of Apple’s main suppliers. Apple is also cutting production of iPhone SE 3 by at least 20% on lower-than-expected demand.

–          Plans to bring financial services in-house. Apple is developing its payment processing technology and infrastructure for future financial products in a multi-year plan, according to a report by Bloomberg. These services include payment processing, risk assessment for lending, fraud analysis, credit checks and additional customer-service functions such as the handling of disputes. This could help Apple expand its payment features beyond the US. Currently, services such as peer-to-peer payments, Apple Card, and Apple Cash are still US-only.

Comment: Headwinds from signs of softer demand and ongoing regulations may keep Apple’s share price in a consolidation near-term. Share buybacks will continue to lend support to its share price.

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

–          Unionisation headwind. Staten Island warehouse, Amazon’s largest fulfilment centre in New York, is Amazon’s first facility to successfully unionise. Union supporters are calling for higher wages, better health coverage and a safer and more transparent system for monitoring productivity. The impact is small, estimated to be up to a US$200mn increase in annual operating expenses or 0.5% of FY23 PATMI or a 0.03% reduction in net margins.

–          Pentagon contract delayed. The Pentagon said that it would delay its long-awaited Joint Warfighting Cloud Capability contract, or JWCC, to December 2022. Microsoft, Amazon, Google and Oracle have long vied for the valuable contract, which could be worth as much as $10 billion over five years. The contract had initially been expected to be awarded next month.

–          Ongoing regulatory scrutiny. Similar to Apple, the new Digital Markets Act in the EU targets Amazon. Specifically, Amazon will not be allowed to rank its own products or services higher than those of others, a process called “self-preferencing”.

–          Amazon closes acquisition of MGM Studios. The US$8.5bn purchase of MGM is Amazon’s second-biggest acquisition. This will add more than 4,000 film titles and 17,000 TV episodes to Amazon Prime Video.

Comment: Lingering pressure from still growing wages and fuel costs are expected to weigh on Amazon’s upcoming earnings. Pent up demand for services weighing on spending on goods is also another worry for Amazon’s e-commerce business. However, Amazon is beginning to pass on higher costs to its consumers through higher fulfilment fees, which will benefit earnings later in the year.

Netflix Inc (NFLX US, BUY, TP US$427)

–          Price hike in UK and Ireland. With an increase in plan prices by an average of £1, the standard plan is now £10.99, the basic plan is £6.99, and the premium plan is up £2 to £15.99/month. This works out to around US$250mn in additional revenue for the rest of FY22e – roughly 1%.

–          Cracking down on password sharing. Currently, Netflix is testing ways to monetize password sharing across users outside of a single household. It is introducing an “Extra Member” offering as an option to share passwords, at around 20% of an average monthly subscription price.

Comment: NFLX’s price increases globally have been a continuing theme over the last year or so, with hikes in UK/Ireland being no different. During their calls, management has constantly been speaking about raising subscription prices across different geographies as it continues to provide more entertainment value to its users. The crackdown on password sharing is an interesting concept, but it remains to be seen how this could affect NFLX’s popularity, and whether or not this strategy could bring in significant additional revenue.

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

–          Agreed deal to buy Raxium, startup that develops light-emitting diodes for AR devices. This could be a strategy to own more AR/VR hardware components of the actual device it builds.

–          Waymo launching fully driverless robotaxi services in San Francisco. Waymo, which falls within Alphabet’s Other Bets revenue segment, was last valued at more than US$30bn. Waymo began its driverless taxi services in Phoenix, AZ in Oct 20, and recently expanded this service to San Francisco. This service is currently only for Waymo employees as it is still in its fully operational testing phase.

–          Moving to let app developers offer alternative payment methods outside of Google’s Play Store. Alphabet will begin to allow alternative app payment methods, starting with Spotify services. The decision to allow consumers to choose between 2 different billing systems comes in light of heavy scrutiny from regulators regarding the monopolistic nature of Play Store.

Comment: Purchase of a AR/VR hardware startup could be an interesting strategy of GOOGL trying to better control its own AR/VR supply chain. Robotaxi services could be the future of private transportation, allowing companies to save heavily on labour costs. Allowing alternative payment methods outside of its Play Store is definitely a landmark decision for the company, especially with such scrutiny surrounding the monopolistic practices of big tech.

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

Comment: Earnings should remain strong in the upcoming 3Q22 results. Amid major cybersecurity attacks and the ongoing Ukraine conflict, companies will continue upgrading to higher-end licenses for better security. As the economy reopens, recovery in small and medium-sized businesses should drive demand for Microsoft’s productivity software which has 90% market share.

Recommendation

We remain OVERWEIGHT on the FAANGM. Our preferred picks are GOOGL and MSFT. We expect GOOGL to continue benefitting from digital advertising tailwinds, and are also buoyed by the company’s efforts in building up its capabilities for the metaverse through M&A activity. For MSFT, we like the strong corporate demand for its higher-end licenses, and expect strong 3Q22 earnings results.