Tech stocks remain attractive in spite of recession fears: PhillipCapital

To the analyst, FAANGM continues to remain at attractive valuations, as they continue to trade at the lower quartile of their historical valuations at 27x forward P/E.

FAANGM declined 7.9% in June, modestly better than the Nasdaq’s drop of 9%.

The S&P 500 also dropped 8.4% for the month. Meta was the laggard, down 16.7%, with Google the best performer, losing only 4.2%.

In his report dated July 14, Woo observes that high inflation, weakening consumer sentiment, tightening fiscal policy, and the increased fear of a recession continues to place downward pressure on the overall market as investors remain cautious.

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“However, we remain optimistic on FAANGM since long-term secular tailwinds from digital advertising, increasing cloud adoption, and increasing global digitalisation remain intact,” writes the analyst.

For Meta, Woo observes that the departure of Meta’s chief operating officer (COO), Sheryl Sandberg, and several other key employees, a tougher 2HFY2022 ending December outlook due to weak consumer sentiment, and continued scrutiny by government antitrust regulators caused Meta’s stock to perform poorly in June.

On June 1, Sandberg announced that she was stepping down from her position this coming fall, after almost 15 years of service to the company, mentioning that her plan moving forward was to focus more on her foundation, as well as more philanthropic work. Meta’s chief growth officer, Javier Olivan, is to take over the role when Sandberg departs.

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Meanwhile, the analyst also expects Apple’s new M2 chips to be a gamechanger for the company due to their increased efficiency compared with an already efficient set of M1 chips.

Apple launched the new models of the Macbook Air starting from US$1,199 and Macbook Pro US$1,299 laptops, powered by the new M2 processor chip at this year’s Worldwide Developers Conference (WWDC).

The new M2 chip is said to be twice as efficient as other comparable PC chips. Additionally, the new MacBook Air is roughly 20% more expensive than its predecessor, with the price increase supposedly more than covering the additional increases in component pricing.

“MacBook sales numbers would be worth watching to see if the company can pass down the increased costs of these chips to its consumer, especially amidst weakening consumer demand,” says Woo.

At the same time, Apple secured a 10-year media rights deal with Major League Soccer (MLS) worth a minimum of US$250 million per year. “This marks the first major US sports league to align itself with a digital media company, and could pave the way for other leagues to follow suit,” writes the analyst.

Next, Woo sees that Amazon continues to work through its over-capacity and over-staffing issues which were a result of a surge in demand for its services during the Covid-19 pandemic – that has since tapered off.

Amazon recently announced that it would start using drones for its Prime Air deliveries later this year. The service will be initially available only in Lockeford, California as its pilot location, before using feedback and data to improve and expand its operations into other locations.

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Amazon’s annual Prime Day is also slated for mid-July is a test of US consumer demand, especially amidst the current macroeconomic climate. Prime Day is also considered to be a core driver of Prime Membership adoption for Amazon, which leads to increasing revenues as Prime members generally spend 2-3 times on average more than non-members.

“Sales numbers from its Prime Day event in July should be a good indication of which direction consumer demand is heading,” says Woo.

For Netflix, the company continues to streamline its workforce, laying off another 300 employees (approximately 3% of total workforce) during the second round of job cuts, a month after its first round of cuts where it laid off 150 employees in May 2022, as it attempts to better manage its expenses.

According to a May 2022 report by Nielsen, streaming platforms as a share of total TV usage in the US increased about 1.6% m-o-m to 31.9%, taking share from all other traditional segments like cable and broadcast TV. Of the 31.9% share, Netflix leads all platforms at 6.8%, a m-o-m increase of about 0.2%.

“Tailwinds from increasing popularity in streaming services compared to traditional TV should continue to help the company’s long-term growth plans,” says Woo.

Next, Woo sees that potential fines and more antitrust investigations are forcing Alphabet to make adjustments to parts of its business model, and is a trend that can be expected moving forward.

Alphabet is currently easing some of its user data restrictions by offering to let its advertising rivals place ads on YouTube to settle an EU antitrust investigation without a hefty fine. Though an agreement has yet to be reached with regulators, both parties have indicated that they are on a path toward an agreement that would help Alphabet avoid a potential US$15 billion fine.

Investors can also look forward to the company’s 20-for-1 stock split coming up on July 18, which should make the stock more affordable to retail investors, according to Woo.

Lastly, Microsoft is gaining momentum with Azure, as the Covid-19 pandemic has accelerated migration to the cloud.

Amid rising cybersecurity attacks and the ongoing Russia-Ukraine conflict, companies are likely to continue to upgrade to higher-end licenses for enhanced security, says Woo.

“Reopening of offices should also drive demand for Microsoft’s productivity software from small and medium sized businesses,” the analyst writes.

On June 14, Microsoft declared a quarterly dividend of US 62 cents per share, set to be paid on Sept 8 to shareholders of record as of Aug 18. The ex-dividend date is Aug 17.

Photo: Bloomberg