• The FAANGM was up 2.7% in November, lagging both the S&P 500 and the Nasdaq which were up 5.4% and 5.5% respectively.
• AMZN and AAPL were the laggards, down 5.8% and 3.5%. META was the biggest gainer, up 26.8% on news of employee headcount reduction and other cost-cutting initiatives aimed at improving margins.
• With FAANGM earnings yield looking less attractive vs US10Y treasury yield, uncertainty surrounding earnings growth for FY23e, and shrinking margins, we downgrade our rating on FAANGM to NEUTRAL from OVERWEIGHT. Long-term secular tailwinds in cloud and streaming remain intact, but are overshadowed by near-term uncertainties in digital advertising and supply chain constraints in hardware.

Review

Meta Platforms Inc (META US, ACCUMULATE, TP US$113)

• Cut 11,000 jobs in an effort to reduce expenses. Meta announced that it would lay off 11,000 employees (~13% of workforce) as it takes a step towards improving efficiency and reducing expenses. Meta also mentioned that it would be extending its hiring freeze through at least 1Q23, and will continue to cut additional discretionary spending. Operating margin was down 16% YoY in 3Q22.
• Exiting non-core projects as it pivots towards more disciplined spending. With the current pivot into focusing more on developing its core projects, Meta announced during a company townhall that it would be exiting some of its non-core hardware projects. Affected projects were said to be its Portal smart display business, and shutting down existing developmental work on its smartwatch project. At the same time, Meta also declined its option to renew more than 250,000 sq ft of office space in New York – which runs through 2024.

Comment: With the company focusing on cost-cutting measures like reducing headcount and developmental expenses, it should positively expand margins – which have seen sharp contractions of late due to slowing revenue growth and higher expenses.

Apple Inc (AAPL US, BUY, TP US$190)

• iPhone production disruption. Foxconn, Apple’s largest iPhone assembler, entered into a week-long lockdown for its Zhengzhou facility in early November to fight a COVID-19 outbreak. The plant produces ~80% of the iPhone 14 Pro models. Foxconn had previously attempted to operate in a closed-loop system, but some workers refused to return to the factory while others escaped from the site. The disruption caused Apple to warn customers of a longer waiting time to receive their purchases. Foxconn also offered higher bonuses to retain workers and attract new staff. However, protests broke out towards the end of the month due to late salary payments. Some of the workers were eventually offered cash to quit and leave following the incident.
• Fortnite battle alleging App Store monopoly resumes. The lawsuit between Apple and Epic Games took its next steps in the U.S. Court of Appeals. A new challenge for Apple is the emergence of the Justice Department whose lawyers cautioned that the district court may have committed several legal errors in its decision last year that could imperil effective antitrust enforcement. While the Justice Department said it was not picking any side, many of its concerns were similar to Epic’s appeal. A decision from the proceedings is expected within a year, and it is likely to get appealed to the Supreme Court.

Comment: The iPhone production disruption is concerning for Apple as it takes place in the holiday season, its busiest and best-performing quarter of its financial year. Furthermore, it is also affecting the iPhone 14 Pro models, which are in higher demand compared to the base iPhone 14 models. We view that although revenue for the December quarter is likely to be affected, Apple should be able to re-capture those sales when the supply has stabilized as it enjoys strong customer loyalty, and has buyers who are willing to wait despite the extended lead time instead of switching to another smartphone brand.

Amazon Inc (AMZN US, NEUTRAL, TP US$108)

• Cutting jobs for corporate ranks. Amazon is laying off workers as part of its efforts to control costs. The cuts could affect 10,000 employees, roughly 3% of its corporate staff in its retail, devices and HR divisions, and they are unlikely to affect its warehouse workers. CEO Andy Jassy has targeted unprofitable teams and projects as part of a business review – the devices unit being one of the focus as it has lost >US$5bn annually in recent years. The company is offering severance packages and is working with affected employees to land either new internal or external roles.
• Closes three ventures in India. These include its food delivery, education tech businesses, and a wholesale e-commerce website. Amazon closed Amazon Distribution, a dedicated platform for B2B e-commerce for small shops selling household items. However, its bigger wholesale B2B platform Amazon Business that targets small businesses in IT, hospitality, and education sectors remains available. The closures may be due to Indian government’s growing hostility toward Amazon and other US tech companies, as well as Amazon’s efforts to rein in costs.

Comment: Amazon’s layoffs come as no surprise as the company has been struggling with its efficiency since the pandemic situation started to improve. 9M22 operating income was 56% lower than that of FY21. Coupled with a lackluster guidance for the current quarter and macroeconomic uncertainties, it was only a matter of time that Amazon follows the steps of its big tech peers in their efforts to improve margins.

Netflix Inc (NFLX US, BUY, TP US$346)

• Debuting live broadcasts in 2023 with Chris Rock special. In a move to expand its product offerings, Netflix announced its first live broadcast with a new stand-up comedy special featuring Chris Rock, debuting in early 2023. This move comes as more VOD streaming players look to popular live broadcasts to grow their subscriber base.
• Streaming continuing at top spot in US TV usage. An October 2022 report by Nielsen showed that streaming’s overall share of TV usage in the US increased for the eighth straight month, reaching 37.3% (0.4% MoM), compared to 32.9% from cable TV. Of the 36.9% streaming share, Netflix is second with 7.2%, trailing only YouTube at 8.5%, with Disney+ at 2.0%. Total TV viewing rose 2.2% MoM in October.

Comment: NFLX’s stock has risen almost 37% in the last 3 months, mainly due to better-than-expected subscriber numbers, and the potential margin expansion from its much anticipated ad-supported subscription tier. We do expect long-term tailwinds from increasing adoption of streaming services to continue given the shifts in consumer preferences away from traditional TV.

Alphabet Inc (GOOGL US, BUY, TP US$124)

• Fined US$391mn for location tracking breaches. Alphabet will pay US$391mn to 40 states in the US as part of a consumer privacy settlement. The states alleged that GOOGL misled users into thinking they had turned off location tracking, while still collecting their location information. As part of the deal, GOOGL also agreed to significantly improve its location tracking disclosures and user controls beginning next year. GOOGL has paid out just over US$3bn in fines and settlements in 2022, roughly 1.5% of its YTD revenue.

Comment: GOOGL’s stock continues to be hampered by weakness in the global digital advertising industry, with revenue slowing and margins contracting. Much uncertainty still surrounds its revenue outlook for FY23e given pullbacks in discretionary spending by many marketers.