PhillipCapital’s Jonathan Woo and Timothy Ang have maintained their “overweight” call on the FAANGM sector. FAANGM refers to Facebook (now Meta Platforms), Amazon, Apple, Netflix, Google (now Alphabet) and Microsoft.
Woo and Ang say that the FAANGM sector gained 5.9% in March, beating out the S&P 500’s figure of 5.2%.
Meta was the outperformer, gaining 9.3% in March, while on the other hand, Netflix continued to underperform, declining 3% in the month, largely due to a continued negative effect from poor 4QFY2021 earnings.
The highlight for this month, they point out, was the agreement over a newly created Digital Markets Act in the EU, mainly targeting monopolistic practices of “gatekeeper” large tech companies, in particular the FAANG stocks.
Woo and Ang expect that on the hardware side, the easing of the supply chain and labour shortages should continue to benefit Apple and Amazon.
“For software, we expect corporate demand for Microsoft’s higher-end licenses to continue as concerns over increased cybersecurity linger. As for the internet, we like Alphabet’s robust M&A activity as it invests more in its capabilities for the metaverse.”
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As for the specific stocks, the analysts give a “buy” rating to all the stocks in the sector except Alphabet, which they give an “accumulate” call.
Meta
For Meta, Woo and Ang has given it a target price of US$312 ($427), and note the company’s plan to build out a one million sq ft data centre in Kansas City.
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The facility will cost more than US$800 million to build, making it Meta’s 16th data centre within the US and its 21st globally.
This is in line with company guidance for its FY2022 capex of US$29-34 billion to further its capabilities for the metaverse, and to better compete with other social media companies.
They think that these investments should pay off in the long run, as Meta competes for a position in the social media and digital advertising space.
Apple
For Apple, the analysts highlight its new iPhone and iPad subscription service in the pipeline, which, is its “big push” to a more recurrent revenue model.
According to a report from Bloomberg, the program will let users buy iPhone and iPad hardware by paying a monthly subscription fee.
The monthly fee will depend on which device the user chooses, and the new service may be launched later this year.
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Apple may also allow users of the program to swap out their devices for new models when fresh hardware comes out, which historically happens once a year for the iPhone, iPad and Apple Watch.
Apple also is developing its payment processing technology and infrastructure for future financial products in a multi-year plan, according to Bloomberg.
These services include payment processing, risk assessment for lending, fraud analysis, credit checks and additional customer-service functions such as the handling of disputes.
This could help Apple expand its payment features beyond the US, as services such as peer-to-peer payments, Apple Card, and Apple Cash are still US-only.
Despite this, there is “more worry” on the regulatory front for Apple.
The American Innovation and Choice Online Act received the US’ Department of Justice's backing, increasing the chances of it being passed, and in the EU, European lawmakers reached an agreement on the Digital Markets Act, setting the stage for it to go into effect next year.
The regulations, if passed, will allow developers to make their apps available to iPhone users without going through Apple’s App Store, which contributed about 15% of PATMI in FY2020, and Apple may even be barred from pre-installing its apps on iPhones.
In addition, Apple chip partner TSMC warns of slowing smartphone demand, due to continued geopolitical uncertainties and new lockdowns in China. Apple is also cutting production of the iPhone SE 3 by at least 20% on lower-than-expected demand.
Amazon
For Amazon, Woo and Ang give a target price of US$4,079, and highlight a headwind from the unionisation of its warehouse on Staten Island, Amazon's largest fulfilment centre in New York.
Union supporters are calling for higher wages, better health coverage and a safer and more transparent system for monitoring productivity.
Despite this, the analysts say the impact is small, up to a US$200 million increase in annual operating expenses, making up 0.5% of FY23 PATMI or a 0.03% reduction in net margins.
On the regulatory front, the new Digital Markets Act in the EU targets Amazon, similarly to Apple. Specifically, Amazon will not be allowed to rank its own products or services higher than those of others, a process called "self-preferencing".
A bright spot for the company though is its acquisition of MGM Studios. The US$8.5 billion purchase of MGM is Amazon's second-biggest acquisition. This will add more than 4,000 film titles and 17,000 TV episodes to Amazon Prime Video.
Woo and Ang thinks that “lingering pressure” from still growing wages and fuel costs are expected to weigh on Amazon's upcoming earnings, as well as pent up demand for services.
This will divert spending from goods, which is another worry for Amazon's e-commerce business. However, Amazon is beginning to pass on higher costs to its consumers through higher fulfilment fees, which will benefit earnings later in the year.
Netflix
Netflix has been given a target price of US$427, as it prepares to hike rates in the UK and Ireland by an average of GBP1 ($1.75) per month. This works out to around US$250million in additional revenue for the rest of FY22e – roughly 1% more.
It is also moving to crack down on password sharing, and testing ways to monetise password sharing across users outside of a single household.
Netflix is mulling introducing an “Extra Member” offering as an option to share passwords, at around 20% of an average monthly subscription price.
Woo and Ang comment that price increases globally have been a “continuing theme” over the last year or so, with hikes in UK/Ireland being no different.
The crackdown on password sharing, they note, is an interesting concept, “but it remains to be seen how this could affect Netflix’s popularity, and whether or not this strategy could bring in significant additional revenue.”
Alphabet
Google was handed a target price of US$3,493, with the analysts noting its deal to buy Raxium, a startup that develops light-emitting diodes for AR devices. This could be a strategy to own more AR/VR hardware components of the actual device it builds.
The company is also moving to let app developers offer alternative payment methods outside of Google’s Play Store, starting with Spotify services.
The decision to allow consumers to choose between 2 different billing systems comes in light of heavy scrutiny from regulators regarding the monopolistic nature of Play Store.
“Allowing alternative payment methods outside of its Play Store is definitely a landmark decision for the company, especially with such scrutiny surrounding the monopolistic practices of big tech,” Woo and Ang note.
They also think that the purchase of an AR/VR hardware startup could be an interesting strategy for Google trying to better control its own AR/VR supply chain.
Separately, Google subsidiary Waymo is launching fully driverless robotaxi services in San Francisco, and the analysts' view is that robotaxi services could be the future of private transportation, allowing companies to save heavily on labour costs.
Microsoft
Finally, for Microsoft, which was handed a US$410target price, Woo and Ang are of the view that earnings should remain strong in the upcoming 3QFY2022 results.
This is amid major cybersecurity attacks and the ongoing Ukraine conflict, which will push companies to upgrade to higher-end licenses for better security.
Furthermore, as the economy reopens, recovery in small and medium-sized businesses should drive demand for Microsoft's productivity software, which has a 90% market share.
