• The FAANGM declined 14.9% in April, worse than Nasdaq’s drop of 13.4%. S&P 500 was down 8.8%. NFLX continued to underperform, declining 49% in the month, largely due to a negative effect from a contracting user base. Meta, Apple, and Microsoft were the outperformers, declining 10%.
• 1Q22 earnings for the FAANGM stocks were largely in line with analyst consensus estimates, with slowing growth as the overall theme for the month, led by the overhang from the Russia/Ukraine conflict, a weaker macro environment, and a general de-rating of tech stocks.
• On the hardware side, short-term headwinds continue to cloud AAPL’s outlook, with Covid shutdowns and lingering semiconductor shortages affecting supply. Higher costs continue to affect AMZN’s margins, with decreasing productivity and overcapacity affecting efficiency. For software, we expect corporate demand for MSFT’s higher-end licenses to continue. And for the internet, we like the increasing popularity of YouTube Shorts as an additional revenue driver for GOOGL, as well as continued growth in Google Cloud.
• We remain OVERWEIGHT on FAANGM. 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.

Review

Meta Platforms Inc (FB US, BUY, TP US$312)

• Testing new monetization tools for the metaverse. Meta has begun testing tools with a select group of creators which would allow them to sell virtual items in Horizon Worlds – a metaverse created by Meta and Verizon. Creators will be rewarded for building worlds that attract the highest amount of user time spent on them.
• Opening first retail store globally. Meta opened its first Meta Store on 9 May 2022 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 – Portal video chat device, Quest 2 VR headset and Ray-Ban Stories smart sunglasses.

 Comment: Meta’s 1Q22 earnings were a mixed bag, with EPS beating estimates on lower- than-expected expenses, and user growth continuing. However, the outlook for 2Q22 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.

Apple Inc (AAPL US, BUY, TP US$214)

• China factory shutdowns. 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.
• Unionisation threat. 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, the agency confirmed, and could soon approve a vote. Apple employees at a New York store are also aiming to file for an election. Some Apple organizers have said they seek higher pay, increased tuition reimbursement and larger 401(k) matches, among other goals.

Comment: Apple’s 2Q22 earnings were good, however, short-term headwinds cloud the outlook. 3Q22 revenue growth will be impacted by US$4bn-8bn due to COVID-19 shutdowns in China, which began in end-March 2022, and lingering semiconductor shortages affecting production and demand. This is substantially larger than in 2Q22.

Amazon Inc (AMZN US, BUY, TP US$3,130)

• Appeal against unionization. Amazon plans to appeal 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. Amazon said in the filing that union organizers threatened employees into voting in favour of the union. It also blamed the NLRB, claiming it suppressed voter turnout by how it set up the voting periods, causing long wait times.
• Regulatory investigation by SEC. The Securities and Exchange Commission is investigating how Amazon has disclosed some details of its business practices, including how it uses third-party-seller data for its private-label business. There were 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.

 Comment: 1Q22 results were weaker than expected due to lingering cost pressures. Revenue guidance was also weak. The priority now is to work down costs in overstaffing and overcapacity, while working to pass on some inflationary costs to sellers. Cost pressures could linger up to three quarters.

Netflix Inc (NFLX US, BUY, TP US$427)

• In talks with the NFL for a collaboration. NFLX and the National Football League (NFL) are in talks 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 NFLX’s slate of already popular sporting content and could be a catalyst for increased subscriptions.

 

Comment: NFLX’s 1Q22 earnings call was quite poor, with only EPS beating consensus estimates. The stock price was driven down by slowing revenue growth, a quarter of negative paid net additions, and continued weak guidance for 2Q22.

Alphabet Inc (GOOGL US, BUY, TP US$3,493)

• Pledges US$9.5bn in US offices, data centres for the year. GOOGL unveiled its plans of investing US9.5bn into more US offices and data centres for FY22, an increase of US$2.5bn compared with FY21. 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.

 Comment: GOOGL’s pledge to invest more into offices and data centres is nothing new, and is in line with its expansion of Cloud capabilities. Its 1Q22 earnings met expectations on the topline, but missed heavily on earnings, led by an almost US$6bn 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.

Microsoft Corp (MSFT US, BUY, TP US$410)

Comment: 3Q22 was another strong quarter with revenue and margin beats across virtually all segments. And 4Q22 was guided to be another strong quarter. Reopening of the economy will drive Office Commercial user growth from small and medium sized businesses, while cybersecurity needs will drive ARPU growth through upgrades to premium E5 licenses. Azure will continue to benefit from businesses’ shift to the cloud.

 Recommendation

We remain OVERWEIGHT on the FAANGM. Our preferred picks are still GOOGL and MSFT. We expect GOOGL to continue benefitting from digital advertising tailwinds, as well as increasing corporate demand for its high-margin Cloud services. For MSFT, we are bullish on the strong corporate demand for its higher-end licenses, amidst increasing cybersecurity worries.

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