PhillipCapital has maintained its “overweight” call on the FAANGM sector even as the group of six companies saw a selloff that was worse than the Nasdaq and S&P500 indices.
FAANGM refers to the companies of Facebook, Apple, Amazon, Netflix, Google and Microsoft, although Facebook is now known as Meta, and Google now trades under parent company Alphabet.
Analyst Jonathan Woo highlights that the FAANGM grouping declined 14.9% in April, worse than Nasdaq’s drop of 13.4% and the S&P 500 drop of 8.8%.
“Following the sell-off in tech stocks, FAANGM stocks are currently trading at attractive valuations, near their all-time lows. We believe that long-term secular tailwinds remain intact, and should overshadow current short-term headwinds in the market,” he says.
Woo says that 1QFY2022 earnings for the FAANGM stocks were largely “in line” with analyst consensus estimates, with slowing growth as the overall theme for the month.
This was led by the overhang from the Russia-Ukraine conflict, a weaker macro environment, and a general de-rating of tech stocks.
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Despite this, he has kept “buy” calls for all the companies, with target prices of US$312 ($435), US$214, US$3,130, US$427, US$3,493 and US$410 respectively for Meta, Apple, Amazon, Netflix, Alphabet and Microsoft.
Among the FAANGM companies, Woo says that Netflix continued to underperform, calling it “quite poor” with its earnings per share beating estimates.
The counter fell 49% in the month, largely due to a negative effect from a contracting user base.
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However, he points out that Netflix is in talks with the National Football League (NFL) about collaborating on a docuseries type content production, similar to its other sport-oriented programs “Formula 1: Drive to Survive” and “The Last Dance”.
“If successful, this could be a huge content addition to Netflix’s slate of already popular sporting content and could be a catalyst for increased subscriptions.”
On the other hand, Meta, Apple, and Microsoft were the “outperformers”, despite declining 10%.
Meta has begun testing new monetization tools for the metaverse and this would allow them to sell virtual items in Horizon Worlds – a metaverse created by Meta and Verizon.
Meta also opened its first Meta Store on May 9 on its campus in California. The store is expected to give users a chance to physically test out various hardware products related to the metaverse, such as the Portal video chat device, Quest 2 VR headset and Ray-Ban Stories smart sunglasses.
Woo sees its 1QFY2022 results as a mixed bag, with EPS beating estimates on lower- than-expected expenses, and user growth continuing.
“However, the outlook for 2QFY2022 remains weak with several headwinds from Apple’s ATT changes, a strengthening USD, and loss of advertising revenue from its ban in Russia expected to continue.”
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On the hardware side, he says that short-term headwinds continue to cloud Apple’s outlook, with Covid shutdowns and lingering semiconductor shortages affecting supply.
Apple faces China factory shutdowns as Covid-19 outbreaks have hit Shanghai and the neighbouring provinces of Jiangsu and Zhejiang over the last month—a region with one of the highest concentrations of Apple’s top suppliers.
As Shanghai locked down and nearby regions imposed stringent Covid-prevention measures, many suppliers halted production, with some shutdowns lasting weeks. However, Apple is among the businesses taking precedence in local governments’ efforts to restart factories.
In addition, Woo highlights that several Apple stores have shown interest in unionizing, according to organizers. Workers from a store in Atlanta last week filed for a union election with the National Labor Relations Board and could soon approve a vote.
Apple employees at a New York store are also aiming to file for an election, with organisers saying that they seek higher pay, increased tuition reimbursement and larger 401(k) matches, among other goals.
He notes that Apple’s 2QFY2022 earnings were good, but warn that “short-term headwinds cloud the outlook.”
Woo thinks that 3QFY2022 revenue growth will be impacted by US$4 billion-US$8 billion due to Covid-19 shutdowns in China, which began in end-March 2022, and lingering semiconductor shortages affecting production and demand.
For Amazon, higher costs continue to affect its margins, with decreasing productivity and overcapacity affecting efficiency.
The company is currently under investigation by the Securities and Exchange Commission (SEC) on how Amazon has disclosed some details of its business practices, including how it uses third-party-seller data for its private-label business.
This comes after claims that Amazon employees routinely used individual third-party-seller data to develop products for its own brands.
Amazon had launched an internal investigation of its private-label division but has declined to provide a copy of its report to a congressional committee.
1QFY2022 results were weaker than expected due to lingering cost pressures. Revenue guidance was also weak, and cos pressures could linger up to three quarters.
“The priority now is to work down costs in overstaffing and overcapacity, while working to pass on some inflationary costs to sellers.”
It is also appealing its loss last week to union organizers in New York, where workers voted to establish the company’s first US union.
In a filing, Amazon signalled that it would appeal because of actions taken by the union, as well as the National Labor Relations Board, before and during the election.
For software and the internet front, Woo expects corporate demand for Microsoft’s higher-end licenses to continue, and he likes the increasing popularity of YouTube Shorts as an additional revenue driver for Alphabet, as well as continued growth in Google Cloud.
Woo writes that for Alphabet, it has pledged US$9.5 billion in US offices and data centres for the year, an increase of US$2.5billon compared with FY2021.
This investment is expected to create at least 12,000 full-time jobs, with the focus on building new data centres in Nevada, Nebraska, and Virginia.
However, he says this is “nothing new”, and is in line with its expansion of Cloud capabilities.
For its 1QFY2022, Alphabet’s revenue met expectations, but missed heavily on earnings, led by an almost US$6billion swing in unrealized loss of its equity investments.
Revenue growth is back to pre-pandemic levels, with growth drivers Cloud and YouTube continuing to increase at a rapid pace.
Finally for Microsoft, Woo thinks that its 3QFY2022 was another “strong quarter”, with revenue and margin beating expectations across virtually all segments.
Furthermore, 4QFY2022 was guided to be another strong quarter, as the reopening of the economy will drive Office Commercial user growth from small and medium-sized businesses, while cybersecurity needs will drive average revenue per unit (ARPU) growth through upgrades to premium E5 licenses.
Microsoft’s Azure product will also continue to benefit from businesses’ shift to the cloud, he concludes.
