• FAANGM outperformed, gaining +1.6% in October after better-than-expected results from most of Big Tech. S&P 500 and Nasdaq were both down -2.2% and -2.1%, respectively, as a result of increasing volatility in the Middle East.
• NFLX (+7.7%) and MSFT (+7.1%) were the biggest gainers in Oct 23 after both companies beat consensus estimates for revenue and earnings, and issued better-than-expected forward guidance. GOOGL (-5.8%) was the biggest loser after issuing disappointing Cloud growth vs its peers.
• Earnings growth (+45% YoY) for FAANGM was the key highlight of the month as most companies started to see the full effects of their cost optimisation efforts take place. Valuations remain attractive, with 12M Forward P/E -1 Std Dev away from its 10-year average. Digital advertising continues to recover, while demand for tech hardware remain a drag. We maintain an OVERWEIGHT recommendation on FAANGM.

Summary

For October, FAANGM outperformed the broader market, gaining +1.6% on better-than-expected 3Q earnings results, while the S&P 500 and the Nasdaq both declined -2.2% and -2.1%, respectively.

Gainers: NFLX (+7.7%) and MSFT (+7.1%) were the biggest gainers for October after both companies beat consensus estimates for revenue and earnings.

Laggards: GOOGL (-5.8%) was the biggest loser on disappointing Cloud growth.

Earnings: Overall revenue growth continued to accelerate slightly (3Q23: 8.1% YoY vs 2Q23: 6.8% YoY), boosted by a recovery in the digital advertising industry, and resilient e-commerce demand. The highlight was earnings growth, which accelerated significantly to 45% YoY, ~3x vs 2Q23, as most FAANGM companies began to feel the full effects of their cost optimisation efforts. 4Q23e guidance for META, AMZN, NFLX, and MSFT were all very encouraging, implying 10-20% revenue growth expectations. Growth for AAPL is expected to remain flat YoY due to continued cyclical weakness for tech hardware (other than iPhone).

Review

Meta Platforms Inc (META US, BUY, TP US$375)

• Offering ad-free subscriptions for Facebook and Instagram. In an effort to meet EU regulatory requirements, Meta will offer users in EU ad-free access to FB and IG for a fee of EUR9.99 per month on web, or EUR12.99 on mobile (iOS/Android). For users that are subscribed, Meta will also not use their information for any ad offerings to free users.
• 3Q23 results blew out estimates. Meta announced better-than-expected revenue growth of 23% YoY, mainly driven by higher ad impressions and a general early-stage recovery in the digital advertising market. Earnings blew out estimates by ~20% as revenue grew while total expenses fell -7% YoY. Meta’s net margin of 34% was almost back to pandemic highs.

Comment: With a recovery in the digital ad market underway, we believe that companies like Meta are well positioned to reap all the benefits due to its substantial reach and improving targeted ad performance. In addition, Reels monetisation is no longer a headwind to revenue growth, and is expected to be a slight tailwind moving into FY24e. The only knock would be Meta’s guidance of increasing total expenses for FY24e which should be a slight drag on margin expansion. We upgrade to a BUY rating from ACCUMULATE, with a raised target price of US$375 (prev. US$360).

Apple Inc (AAPL US, ACCUMULATE, TP US$194)

• 4Q23 results were a mixed bag. Revenue contracted 1% YoY, but in-line with estimates as Services saw record revenue (16% YoY) and iPhone sales remained resilient. The big drag on revenue were Apple’s other products like its iPad, Mac, and Wearables, which all saw YoY contractions due to unfavourable product launches and soft demand for hardware. Earnings beat expectations by ~5% due to larger contribution of higher-margin Services revenue. Apple remained positive on Services and iPhone growth for 1Q24e, while it continues to expect weakness for its other products.

Comment: Moving forward, we believe that overall growth will mainly come from Apple’s Services segment as its installed-base increases. This will also be tailwind for margins as Services margin is double that of Product. The key markets for iPhone growth remains India and China, although we do not expect significant iPhone revenue growth as increases in ASPs are unlikely due to product mix. We upgrade to an ACCUMULATE rating from NEUTRAL, with a raised target price of US$194 (prev. US$183).

Amazon.com Inc (AMZN US, BUY, TP US$190)

• Earnings beat estimates on cost efficiencies and strong sales. Revenue growth remained resilient at 13% YoY as consumers continued to purchase on AMZN’s retail platform. In addition: 1) improving efficiency of its logistics network; 2) easing inflationary pressures on shipping/rail rates; 3) and solid 26% YoY growth in advertising, contributed to a 580bps YoY expansion in operating margins (7.8%), also leading to a ~2.5x increase in the company’s adj. earnings – beating estimates by ~60%.

Comment: AMZN benefitted from resilient consumer retail spending in 3Q23. In addition, efforts in regionalizing its fulfillment network seems to be paying off, with lowered cost to serve and delivery times as a result. We expect future margin expansion to come from growth in higher-margin AWS and advertising – which we see as a huge opportunity for AMZN given it is still only ~8% of total revenue.

Netflix Inc (NFLX US, ACCUMULATE, TP US$455)

• 3Q23 results were a hit on better subscriber growth. Netflix reported its best paid subscriber addition (8.8mn) in 3 years, alleviating fears of stagnating growth. Revenue grew 8% YoY and was in line with estimates, while earnings increased 20% on greater operating leverage. Guidance was positive, with revenue growth expected to accelerate due to price hikes and incremental benefits from its Paid Sharing initiative.
• Streaming usage slips for 2^nd straight month. A September 2023 report by Nielsen showed that streaming’s overall share of TV usage in the US dipped for a 2^nd straight month to 37.5% (-0.8% MoM). Streaming usage was hurt by an increase in sports viewing on Broadcast and Cable networks. Cable TV fell by 0.4% MoM to 29.8%, while Broadcast TV grew +2.6% MoM to 23%, with sports viewing on Broadcast TV increasing 360%. Of the 37.5% streaming share, Netflix remains second with 7.8% (-0.4% MoM), trailing YouTube at 9.0% (-0.1% MoM), with Disney+ at 1.9% (-0.1% MoM).

Comment: Paid membership additions were the highlight of Netflix’s results, with the company adding the highest number of members since the middle of the pandemic. A large portion of these new additions came from converting password borrowers into paying members as Netflix continues to crack down on password sharers/borrowers. This effect is expected to continue for several more quarters, and when coupled with price hikes, should give overall revenue growth a boost in the near-term. We upgrade to an ACCUMULATE rating from NEUTRAL, with a raised target price of US$455 (prev. US$446).

Alphabet Inc (GOOGL US, BUY, TP US$144)

• Plans to start manufacturing Pixel 8 phones in India. GOOGL will partner both domestic and international manufacturers to produce Pixel 8 phones locally in India, while also mentioning that India was a priority market for the company given its growing middle class. The new Pixel 8 is expected to begin selling in 2024.
• Earnings were positive, but Cloud growth disappointed. Revenue of US$76.8bn (11% YoY) beat estimates marginally on a recovery in digital advertising, with earnings also improving significantly YoY due to increased efficiency efforts over the last 9-12 months. The main disappointment was a continued deceleration in Cloud growth, a sharp contrast to competitors like Microsoft’s Azure – which saw a significant acceleration in growth (3Q23: 29% YoY vs 2Q23: 22%).

Comment: Alphabet’s earnings were actually pretty good across the board. As the main beneficiary from a recovery in the digital ad market, the company should also expect revenue tailwinds moving forward. Margins should also expand as a result given Alphabet’s lower cost base. The main concern for this quarter was decelerating Cloud growth (+22% YoY) which came in below expectations, and was also an indication of Google Cloud losing ground to Azure (MSFT) and AWS (AMZN).

Microsoft Corp. (MSFT US, ACCUMULATE, TP US$375)

• 1Q24 results in line with expectations. Microsoft reported 1Q24 revenue growth of 13% YoY to US$56.5bn primarily driven by strength in its cloud business. Azure revenue growth re-accelerated to 29% YoY as more enterprises migrated their workloads to the cloud as well as growing contributions from AI-enabled services. Office 365 commercial revenue grew 18% YoY driven by a 10% YoY surge in the number of paid users and higher average revenue per user as customers upgrade to E5 license for its advanced functionalities. PATMI grew by 27% YoY to US$22.3bn led by higher operating leverage. 1Q24 revenue/PATMI was in line with expectation at 24%/26% of our FY24e forecasts.

Comments: Microsoft expects 2Q24e total revenue to grow 15% YoY to US$60.9bn driven by strong Azure revenue growth of 26% to 27% YoY on a constant currency basis. Office 365 commercial revenue to grow 16% YoY again led by user growth and higher revenue per user due to E5 momentum. While Office 365 Copilot AI tools commercially launched on Nov. 1, management expects the related revenue to grow gradually over time. Gaming revenue is expected to grow in the mid-to-high 40% range, with roughly 35 percentage points of contribution from the Activision Blizzard deal. For FY24e, operating margins are expected to remain flat at 42% vs FY23 after factoring in both revenue and expenses associated with the Activision deal.