PhillipCapital Research analysts Jonathan Woo and Maximilian Koeswoyo have kept their “overweight” call on the FAANGM sector as they believe that these counters will continue to be winners in the long run. FAANGM refers to Facebook (now Meta Platforms), Amazon, Apple, Netflix, Google (now Alphabet) and Microsoft.
In the month of August, FAANGM stocks declined 5.0%, modestly outperforming the Nasdaq’s loss of 5.2%. Meanwhile, the S&P 500 also declined 4.2% in August.
At the same time, elevated inflationary pressures, macroeconomic weakness and interest rate uncertainty continue to place downward pressure on FAANGM in August, after a brief relief rally in July. “Now, we are starting to see FAANGM stabilise after its steep sell-off earlier this year, down only 0.7% over the last 3 months,” write Woo and Koeswoyo.
Overall, the analysts believe that uncertainty over the severity of interest rate hikes will continue to dampen the overall market. “However, we expect FAANGM to be long-term winners given secular tailwinds for cloud, cybersecurity, and streaming services still remaining intact,” they add.
Meta
In their report, the analysts are keeping “buy” on Meta with a target price of US$221 ($311.02). Meta recently announced that it is jumping into the corporate bond market by issuing US$10 billion worth of AA-rated bonds in four different parts, with the 40-year bonds yielding 165 basis points (bps) above treasury yields. The company saw almost US$30 billion in demand for its bond offering. “It is expected that the issuance will help to alleviate the company’s shrinking cash position as expenditures continue to increase,” write the analysts.
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Additionally, partnering with Jio Platforms in India, Meta also announced that it would allow customers in India to access JioMart’s full catalogue of groceries, and purchase them all within WhatsApp.
Woo and Koeswoyo find that the issuance of bonds seems like a very calculated strategy for the company, especially as it has seen a US$24 billion y-o-y decrease in its cash position due to an increase in spending on the metaverse. “The launch of end-to-end grocery purchases within WhatsApp is in line with the company’s continued focus on increasing monetization in its business messaging products,” the analysts say.
“We do expect this expansion of monetisation to continue across more products and geographies,” they add.
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Apple
Meanwhile, the analysts are also keeping their “buy” call on Apple with a target price of US$198. The tech company is preparing to manufacture its new iPhone in India months earlier than it did previous models, a sign that the company is boosting production outside of its traditional base in China. Foxconn, Apple’s Taiwan-based supplier, has studied the process of shipping items from China and assembling iPhone 14 at its plant outside Chennai in southern India. The new iPhone models would be made for both domestic consumption as well as exports. As of 2021, India accounted for about 3.1% of Apple’s global manufacturing base, up from 1.3% in 2020, and is expected to reach 5%-7% this year.
Apple is also expected to unveil the new iPhone 14 lineup during its biggest annual product launch event that is taking place on Sept 7. This year’s event is scheduled at an earlier date than previous years, and some analysts believe this would allow the company to capture more sales in the July-Sept quarter, write Woo and Koeswoyo.
To Woo and Koeswoyo, Apple’s move to boost its production outside of China is an indication that the company is attempting to mitigate concentration risks, especially during the recent heightened political tension between the US and China. “However, such a transition may pose a challenge as it requires Apple’s suppliers to make substantial investments on building new production plants,” the analysts caution, considering how both skilled and unskilled workers in India may not be as available as they are in China with India’s infrastructure also lagging.
“The attractiveness of the to-be-launched products will likely be the key sales growth driver for FY2023,” they add.
Amazon
The analysts, on the other hand, have kept their “neutral” call on Amazon with a target price of US$133. The company is closing its in-house telehealth service built for employees and businesses following the purchase of 1Life Healthcare. The decision was made because the business did not meet the needs of potential business customers Amazon is targeting and the shutdown is expected to take place by year-end FY2022.
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Amazon continues to add revenue streams ahead of the holiday season as well to counter inflationary pressures. The company is passing on some costs to sellers that use its e-commerce platform (“holiday peak fulfilment fee”) as it attempts to offset increased operating costs during the holiday period. Amazon said it had previously absorbed such costs, though those expenses are reaching new heights, write the analysts.
The company also plans to hold a second Prime Day-like event for the first time in 4Q2022. The moves could help Amazon boost revenue and lessen y-o-y growth declines after the pandemic-induced shopping accelerated e-commerce.
Amazon is also buying the robo-vacuum maker Roomba for US$1.7 billion, which would make it the fourth-largest acquisition by the company. The deal came as iRobot was struggling as it reported a 30% drop in sales in 2QFY2022 due to reduced orders, supply chain problems, and a stronger dollar. Amazon agreed to pay US$61 a share in the all-cash deal, which represents a 22% premium.
“Amazon’s move to counter inflationary pressure via new revenue streams may prove to be a creative way to boost FY2022 performance, especially during the holiday season when retail sales are at its peak,” Woo and Koeswoyo write. “The iRobot acquisition will allow Amazon to enhance its smart home capabilities as it adds Roomba to its portfolio alongside other existing products like Alexa virtual assistant speaker and Ring video doorbell.”
Netflix
Next, the analysts are keeping their “buy” call on Netflix with a target price of US$399. Netflix is planning to price its new ad-supported subscription tier at around US$7-US$9 per month as compared to their standard plan at around US$15.50, offering a customer-friendly low load of around 4 mins per hour of ads in the initial stages. At present, rival Disney+ ad-supported plans are priced at US$7.99 per month.
According to a July report by Nielsen, streaming platforms as a share of total TV usage in the US increased about 1.1% m-o-m to 33.7%, edging out other traditional segments like cable at 34.4% and broadcast TV at 21.6%, marking the first time that streaming has taken the top spot in these rankings. Of the 34.8% streaming share, Netflix leads all platforms at 8.0%, a m-o-m increase of about 0.3%.
“Netflix’s development of its new ad-supported subscription tier seems to be well underway and on schedule, it would be interesting to see the take-up rate for this new plan, especially with a price point that is around half that of a standard plan,” write the analysts. “Streaming continues to grow from strength-to-strength in the US, finally surpassing cable TV with regard to total TV usage.”
“This should continue to provide tailwinds for the overall streaming industry, which should directly benefit Netflix,” they add.
Alphabet
In their report, Koo and Koeswoyo are keeping their “buy” call on Alphabet Inc with a target price of US$139.
Alphabet was recently fined A$60 million by Australian regulators for misleading users, when it was found that Google Australia had breached its consumer law with regard to personal data collection. This occurred between Jan 2017 and Dec 2018, with Google taking steps to resolve the issue by the end of 2018.
Alphabet’s Fitbit unit also recently announced a trio of new devices– Inspire 3, Sense 2, Versa 4 – set to ship later this month. Both the Sense 2 and Versa 4 smartwatches are said to have more than 6 days of battery life, with a 12-minute fast charge representing 1 full day of battery life. This comes as Google continues to compete with other fitness accessory manufacturers like Apple and Garmin, note the analysts.
“Big Tech continues to be monitored very closely by regulators around the world, with Alphabet no exception to this, where the latest fine by Australian regulators is just another example of attempts to keep Big Tech in check,” says Woo and Koeswoyo.
“We like Alphabet’s continued investments in the pandemic-accelerated smart-fitness industry, especially as it leverages on its ecosystem of hardware products and fitness apps,” they add. “We do believe that this industry will continue to grow in the long-term, especially as consumers focus more on their mental and physical wellbeing.”
Microsoft
Meanwhile, the analysts have kept their “buy” call on Microsoft with a target price of US$332.
Microsoft’s pending US$69 billion acquisition of gaming giant Activision Blizzard faces an in-depth scrutiny by the UK’s antitrust authority. The Competition and Markets Authority cited competition concerns in the gaming consoles, multi-game subscription services and cloud gaming services. Microsoft and Activision have until Sept 8 to come to an acceptable agreement with the regulator, where in the event that the companies do not provide suitable remedies, the deal would be automatically referred to an in-depth investigation.
“We believe that strong corporate demand for premium E5 licences will continue to grow given the increasing cybersecurity attacks,” write Woo and Koeswoyo. “The demand for cloud infrastructure Azure and Office 365 offerings will also continue to be robust as offices reopen and companies shift to the cloud.”
