• FAANGM was the laggard for a 4^th straight month, declining -5.7% in September. S&P 500 and Nasdaq were also down -4.9% and -5.1%, respectively, with the market repricing a higher-for-longer interest rate narrative set by the Fed.
• META was the biggest gainer (+1.5%) as shares consolidated after a big drawdown in Aug. NFLX was the main laggard (-12.9%), with investors concerned over tepid advertising revenue growth and vague long-term margin guidance.
• Weakness in demand for tech hardware persists, although we are encouraged by green shoots in digital advertising and Cloud. In addition, FAANGM valuations are looking more attractive, with its 12M Forward P/E continuing to trend downwards, -1 Std Dev away from its 10-year average. We maintain an OVERWEIGHT recommendation on FAANGM.

Summary

For September, FAANGM lagged the overall market for a 4^th consecutive month, losing -5.7%. The S&P 500 and Nasdaq were also down -4.9% and -5.1%, respectively, as the overall market began to reprice a higher-for-longer interest rate narrative set by the Fed. The overall performance of FAANGM was underwhelming, with 5 of the 6 companies recording share price declines. It seems that growth investors are erring on the side of caution while awaiting earnings, with forward guidance from Big Tech companies expected to provide more clarity moving into 2024. Current FAANGM valuations are looking relatively more attractive, with its 12M forward P/E ratio (28x) moving -1 Std Dev away from its 10-year average.

Gainers: META was the biggest gainer (+1.5%) as it saw some price consolidation after a sharp decline in the prior month (Aug 23). In addition, positive news surrounding its developments in AI helped to sustain META’s share price.

Laggards: NFLX was the main laggard (-12.9%) likely due to concerns over tepid advertising revenue growth in the near term and vague long-term margin guidance. AAPL slipped -8.9% over weak semiconductor sales numbers from its partners and worries of a China government agency ban on the use of iPhones.

Review

Meta Platforms Inc (META US, ACCUMULATE, TP US$360)

• Quest 3 VR headset announced at Meta Connect. Meta officially announced its new Quest 3 VR/MR headset during its Meta Connect developer conference (27-28^th Sep 23). The new headset will cost 66% more compared to the Quest 2 (US$499 vs US$300), and will also incorporate both VR and AR, similar to Apple’s US$3,499 Vision Pro headset. Meta’s new Quest 3 will come with Qualcomm’s new Snapdragon X2 Gen-2 chip, supporting higher display resolutions. Along with the headset, Meta also unveiled new generative AI tools and a new chatbot powered by gen AI.

Comment: Improvements in Meta’s new Quest 3 headset seem to be heading in the right direction, with a slimmer form factor from each upgrade and better overall performance. It is unclear whether Quest 3 could contribute meaningfully to the company’s revenue growth given the slowing sales in such hardware. Meta has also continued to leverage AI in developing new LLMs and other products to rival OpenAI, Google, and other AI-related companies.

Apple Inc (AAPL US, NEUTRAL, TP US$183)

• Launched iPhone 15. Apple released the iPhone 15 lineup (15, 15 Plus, Pro, and Pro Max) that featured incremental improvements, such as better cameras, improved battery, and new software features. Starting prices for all models remain unchanged on a like-for-like basis (the Pro Max minimum price was raised by US$100 due to elimination of the 128GB model).
• Chinese government usage ban. China ordered officials at its central government agencies not to use Apple’s iPhones and other foreign-branded devices for work or bring them into office. The staff were said to be given instructions by their superiors through work chat groups or meetings.

Comment: We believe any potential iPhone sales growth will be driven by volume and mix as there is minimal increase in the average selling price (ASP). The iPhone lifecycle is estimated to be 3-4 years, implying that current iPhone 12 users are highly likely to upgrade this year. This presents a huge opportunity for Apple due to the large installed base of iPhone 12, as evidenced by the ~40% YoY iPhone sales growth back in FY21. However, the continued sales decline from major suppliers, such as Foxconn and TSMC, suggests that we should not expect an immediate rebound in sales growth. As for the new ban by China, we think it will not have a significant impact on Apple as it will only affect a fraction of the overall sales in the country. 

Amazon.com Inc (AMZN US, BUY, TP US$175)

• FTC lawsuit. The Federal Trade Commission and 17 states sued Amazon, alleging that the company illegally wields monopoly power that keeps prices artificially high and harm its rivals. The agency and the states alleged that Amazon violated antitrust laws by using anti-discounting measures that punished sellers for offering lower prices elsewhere. The government also said sellers on Amazon were compelled to use its logistics service if they wanted their products to appear in Amazon Prime. The lawsuit says FTC could seek a break-up by the company.
• Investment in Anthropic. Amazon said it has agreed to invest up to US$4bn in the AI startup. As part of the deal, the company said Anthropic will be using Amazon’s custom chips to build and deploy its AI software. The startup has also agreed to spend a certain amount of capital on Amazon’s AWS. On the other hand, Amazon agreed to incorporate Anthropic’s technology its products.

Comment: We believe the FTC lawsuit will not have a significant impact on Amazon’s financial performance in the near term. This is because such lawsuits typically take years to reach a verdict. Furthermore, the resolution sought by the FTC still remains unclear. 

Netflix Inc (NFLX US, NEUTRAL, TP US$446)

• Hollywood writers’ strike comes to an end. After a 5-month strike, Hollywood writers are set to return to work again after their unions approved a new contract with major production studios. The new contracts included salary increases – bonuses for high-performing shows with residual payments based on viewership hours, and stronger protection against the use of AI.
• Back to school and NFL schedule hurt streaming. An August 2023 report by Nielsen showed that streaming’s overall share of TV usage in the US dipped slightly to 38.3% (-0.4% MoM, mainly as a result of kids returning to school after the summer break. Cable TV and Broadcast TV usage both increased by +0.6% MoM to 30.2%, and +0.4% MoM to 20.4%, respectively, benefitted by a broader coverage of the NCAA and NFL football seasons. Of the 38.3% streaming share, Netflix remains second with 8.2% (-0.3% MoM), trailing YouTube at 9.1% (-0.1% MoM), with Disney+ at 2.0% (flat MoM).

Comment: The end of the Hollywood writers’ strike is a double-edged sword for Netflix, as content production can now continue, but it would seem at a higher price given the upgraded contracts for writers. This could hurt Netflix’s margin moving forward as costs rise, unless the company decides to increase subscription prices again. In addition, comments from the company’s CFO about ad revenue not contributing meaningfully to overall revenue growth in the near term, and vagueness surrounding long-term company margin guidance failed to shore up investor confidence.

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

• Department of Justice vs Google. The largest antitrust trial in the modern digital era began as GOOGL faces antitrust charges from the US DOJ over alleged illegal means of cementing its monopolistic position in several markets. The allegations centre around exclusive contracts and deals GOOGL made with other companies to make GOOGL products the default search engine on mobile phones and internet browsers, and made it extremely difficult for its competitors to gain any foothold. Barring any appeals, the trial is expected to take a minimum of 2 months to conclude. If the DOJ wins, it could force GOOGL to break off its main search business from other products such as Android and Google Maps – which would be the largest forced breakup of a US company since AT&T in 1984.

Comment: Given past experiences, the antitrust trial vs the DOJ could be an overhang for quite a while, with relatively unclear implications for GOOGL’s business. Additionally, GOOGL is also fighting to overturn a EUR2.4bn antitrust fine imposed by EU regulators in 2021, the first of 3 antitrust fines totalling EUR8.3bn.

Microsoft Corp. (MSFT US, ACCUMULATE, TP US$372)

• Microsoft announced a quarterly dividend increase. On Sep. 19, Microsoft declared a quarterly dividend increase of 10% (or 7 cents) over the previous quarter’s dividend to US$0.75 per share. It’s set to be paid on Dec. 14 to shareholders of record as of Nov. 16. The ex-dividend date is Nov. 15.
• Microsoft completed its takeover of Activision Blizzard. On Oct. 13, Microsoft completed its US$69bn takeover of video game publisher Activision Blizzard after a prolonged anti-trust review process. With the addition of Activision Blizzard, Microsoft got ownership of popular franchises like Call of Duty and became the third-largest gaming company by revenue globally, behind Tencent and Sony. The merger aims to boost demand for Microsoft’s Xbox consoles and Game Pass subscription service. Activision’s trailing-twelve-months (TTM) revenue of US$8.7bn represents 4% of Microsoft’s total revenue and is likely to increase Microsoft’s annual gaming segment revenue by 50% to US$24bn.

Comments: For MSFT, we like the robust corporate demand for its cloud computing platform Azure and expect strong 1Q24e earnings results. Microsoft projects Azure revenue growth of 26% YoY in constant currency while Office 365 commercial revenue is expected to grow by 16% YoY. Meanwhile, Windows and Devices segment revenues will continue to decline due to continued PC market weakness.