FAANGM Monthly – Sep 22 Wake me up when September ends October 19, 2022 196

  • The FAANGM declined 11.6% in September, its weakest month YTD. The Nasdaq fared slightly better, down 10.6%, while the S&P 500 also declined 9.3% for the month
  • The overall market continued to skid after higher-than-expected inflation numbers made sure that the Fed would stay aggressive in raising interest rates as it tries to bring inflation down to its 2% target. A strengthening US dollar should also continue to negatively weigh on FAANGM with ~50% of revenue coming from outside the US.
  • META was the laggard, down 16.7%, while NFLX was the biggest gainer, up 5.3%.
  • We remain OVERWEIGHT on FAANGM as we believe that they will continue to be long-term winners amidst the economic slowdown. FAANGM valuations are also at relatively attractive levels, with forward P/E of 30x slightly below its longer-term average of 31x.

 

 

Review

Meta Platforms Inc (META US, BUY, TP US$221)

  • Deal with Qualcomm to develop VR chips. Meta announced a partnership with chipmaker Qualcomm to develop custom virtual reality (VR) for Meta’s Quest VR devices. The custom chipsets would be based on Qualcomm’s Snapdragon platform, with engineering and product teams from both companies working together.
  • Partnering with Salesforce for business messaging integration. Meta announced that it would integrate its WhatsApp business messaging services with Salesforce services, allowing businesses to chat directly with customers from Salesforces’ platform. This API integration should offer businesses a more seamless experience, while also allowing them to better manage their customers via Salesforces’ Customer 360 applications.

 

Comment: Meta’s deal with Qualcomm to collaborate on developing chips for its VR headsets reaffirms its commitment to investing and improving the company’s Metaverse capabilities, particularly in its hardware as it continues to find a balance between fit and form factor. It’s partnership with Salesforce is also in line with its goal of building out its business messaging capabilities to support commerce activity.

Apple Inc (AAPL US, BUY, TP US$198)

  • Announces new iPhone 14 lineup alongside with other wearable products. The company introduced 4 new iPhone models – iPhone 14, iPhone 14 Plus, iPhone 14 Pro, and iPhone 14 Pro Max. Other products that were launched include the new Apple Watches and the new Airpods Pro.
  • Curbs iPhone 14 production increase. Apple has informed several of its suppliers to cut back on plans of a 7% increase (~6 million units) in iPhone 14 series production capacity after an anticipated surge in demand failed to materialize, partly due to sales in China being down 11% in its first three days of availability compared to the iPhone 13 series in the previous year. The company is aiming to produce 90 million units in 2H22 instead, similar to the production levels in 2H21. Demand for the Pro models is also higher than the normal iPhone 14 models, causing one of the suppliers to shift production capacity from lower-tier models to the premium version.
  • Starts iPhone 14 production in India. Historically, Apple has been producing only older generations of iPhones in the country, but the company has requested its vendors to produce its latest iPhone 14 models in India in 4Q22. Foxconn, a major assembler for iPhones, has begun manufacturing activities in its facility in Chennai. Apple is expected to move around 5% of global iPhone 14 production to India by end of 2022 and could potentially expand the country’s manufacturing capacity to produce 25% of all iPhones by 2025.

 

Comment: The new iPhones’ weaker demand compared to Apple’s internal projection was expected as consumers are facing worldwide surging inflation and rising recessionary fears. However, the discontinuation of iPhone Mini and higher demand for the iPhone 14 Pro models should drive up the average selling price (ASP), dampening the downside, if not contributing to revenue growth. We expect sales to be impacted for the near- to medium-term until inflation starts to taper off. With the holiday season coming up, Apple’s ability to capture the seasonal spending is critical as it starts its new financial year, especially when consumers are expected to cut back on discretionary purchases.

 

Amazon Inc (AMZN US, NEUTRAL, TP US$133)

  • Second Prime member sale event in October. The sales event is meant to start off the holiday shopping season at Amazon, offering deals at a time when shoppers are facing inflationary pressures, with hopes that it will help boost the company’s revenue for 4Q22. The event, called “Prime Early Access Sale”, took place on October 11-12.
  • Pausing logistics expansion across the U.S. Amazon has shut down, called off or pushed back the openings of 66 delivery stations, fulfillment centers, and other facilities, although it continues to move forward with some of its larger distribution center projects. The company is also consolidating operations in areas where multiple similar facilities are located close to one another.

 

Comment: Aside for boosting revenue, we view Amazon’s October Prime event as an avenue for the company to clear some of its excess inventory. Its retail business segment is also facing thinning margin levels, mainly attributed to the inefficiencies from overexpansion during the pandemic. Amazon’s efforts in streamlining its operations should help in improving the situation, although we believe high inflation will continue to put pressure on its profitability.

 

Netflix Inc (NFLX US, BUY, TP US$399)

  • Aggressively pushing ad-supported subscription tier. According to reports, Netflix has been pushing for a 1 Nov 22 release of its ad-supported subscription tier – initially targeted for launch in 1Q23, to get a jump on rival Disney+, who is also set to launch its own ad-supported tier on 8 Dec 22. Netflix has also reportedly been able to secure higher initial rates (US$60 CPM with minimum investment of US$20mn from marketing agencies), compared to rates of ~US$50 CPM by Disney+.
  • Streaming takes top spot in US TV usage. An August 2022 report by Nielsen showed that streaming’s overall share of TV usage in the US increased for the fifth straight month, reaching 35.0% (0.2% MoM), compared to 34.5% from cable TV. Of the 35.0% streaming share, Netflix is tied with YouTube at 7.6%, a MoM decrease of about 0.2%, with Disney+ at a dismal 1.9%.

 

Comment: We are quite encouraged to see such an aggressive tactic from Netflix as it attempts to beat Disney+ to an earlier release of its new service. We are also quite excited to see what the take-up rate for this new service would be, with Netflix expecting around 500,000 members for the ad-supported tier by the end of FY22e. Streaming continuing to extend its lead in US TV usage over cable and broadcast TV should also provide tailwinds for the overall industry.

 

 

Alphabet Inc (GOOGL US, BUY, TP US$139)

  • Looking to shift production of Pixel out of China. Similar to Apple, Alphabet is also looking at shifting 10-20% of its Pixel smartphone production away from China, and into India. This comes as China’s Covid-19 lockdowns and trade tensions with the US continue to disrupt supply chain and manufacturing plans for the company.
  • YouTube increasing monetization of short-form video. Alphabet continues to battle aggressively in the short-form video space with TikTok, lowering its barriers to entry for its partner program at YouTube Shorts to allow more content creators to make money on the platform. This essentially means relaxing its current rules of limiting monetization to creators who have a minimum of 1,000 subscribers, and at least 4,000 hours of videos watched on their channel. Currently, YouTube Shorts is seeing around 30 billion views a day from roughly 1.5 billion monthly users globally.

 

Comment: The move to shift Pixel production away from China seems to be the company’s way of diversifying some its production risks geographically. Strategically, it should also help to improve Pixel sales in the world’s 2nd largest market, with an estimated installed base of around 600 million units. Competition with TikTok continues to be fierce, with Alphabet fighting for market share by reducing monetization limits in an attempt to attract more content creators onto its Shorts platform.

 

 

Microsoft Corp. (MSFT US, BUY, TP US$332)

  • Announces a quarterly dividend increase. On 20 Sep 22, Microsoft declared a quarterly dividend increase of 10% (or 6 cents) over the previous quarter’s dividend to US$0.68 per share. It’s set to be paid on 8 Dec 22 to shareholders of record as of 17 Nov 22. The ex-dividend date is 16 Nov 22.
  • EU antitrust regulator sets 8 Nov deadline for Activision Blizzard deal. The European Union’s antitrust authority has set a provisional deadline of 8 Nov 22 to clear Microsoft’s proposed US$69bn acquisition of gaming giant Activision Blizzard. The regulator can approve the merger deal with or without remedies after its preliminary review, or it can launch an in-depth investigation of the merger’s effects on competition. Microsoft CEO Satya Nadella remains confident that the acquisition will close in FY23.

 

Comments: Demand remains strong for Microsoft’s Azure cloud computing platform and Office 365 offerings amid companies’ transitions to the cloud and reopening of offices. The momentum in premium E5 licenses looks solid due to increasing cybersecurity attacks.

 

 

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About the author

Profile photo of Jonathan Woo

Jonathan Woo
Research Analyst
PSR

Jonathan covers the US technology sector focusing on internet companies. Formerly a national and professional athlete, he graduated from the University of Oregon with a Bachelor’s Degree in Social Sciences.

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