Aug 22 Seeing some stabilisation
- The FAANGM declined 5.0% in August, modestly better than the Nasdaq’s loss of 5.2%. The S&P 500 also declined 4.2% for the month
- Elevated inflationary pressures, macroeconomic weakness and interest rate uncertainty continue to place downward pressure on FAANGM in Aug, 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.
- We remain OVERWEIGHT on FAANGM as we continue to believe that they will be long-term winners. Secular tailwinds remain intact for streaming, cloud, cybersecurity, and digital advertising.
Meta Platforms Inc (META US, BUY, TP US$221)
- Planning to sell US$10bn worth of bonds. Meta announced that it is jumping into the corporate bond market by issuing US$10bn worth of AA-rated bonds in 4 different parts, with the 40-year bonds yielding 165bps above treasury yields. The company saw almost US$30bn 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.
- Launching grocery delivery in India within WhatsApp. Partnering with Jio Platforms in India, Meta announced that it would allow customers in India to access JioMart’s full catalog of groceries, and purchase them all within WhatsApp. It’s estimated that around 500 million people use WhatsApp in India.
Comment: The issuance of bonds seems like a very calculated strategy for the company, especially as it has seen a US$24bn YoY 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. We do expect this expansion of monetization to continue across more products and geogrpahies.
Apple Inc (AAPL US, BUY, TP US$198)
- Cutting iPhone 14 production lag. Apple 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.
- Moving forward iPhone 14 launch date. Apple is expected to unveil the new iPhone 14 lineup during its biggest annual product launch event that is taking place on 7 Sep 22. 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-September quarter.
Comment: Apple’s move to boosting 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 USA and China. However, such transition may pose a challenge as it requires Apple’s suppliers to make substantial investments on building new production plants. Both skilled and unskilled workers in India may not be as available as they are in China with India’s infrastructure also lagging. Apple fans are also excited about the annual product launch event taking place on 7 Sep 22. The attractiveness of the to-be-launched products will likely be the key sales growth driver for FY23.
Amazon Inc (AMZN US, NEUTRAL, TP US$133)
- Shutting down Amazon Care telehealth unit. Amazon 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 FY22.
- Adding revenue streams ahead of holiday season. Amazon is adding revenue streams ahead of the holiday season to counter inflationary pressures. The company is passing on some costs to sellers that use its e-commerce platform (“holiday peak fulfillment fee”) as it attempts to offset increased operating costs during the holiday period. Amazon said it had previously absorbed such costs, but those expenses are reaching new heights. The company also plans to hold a second Prime Day-like event for the first time in 4Q22. The moves could help Amazon boost revenue and lessen YoY growth declines after the pandemic-induced shopping accelerated e-commerce.
- Acquisition of iRobot. Amazon is buying the Roomba (robo-vacuum) maker for US$1.7bn, 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 2Q22 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.
Comment: Amazon’s move to counter inflationary pressure via new revenue streams may prove to be a creative way to boost FY22 performance, especially during the holiday season when retail sales are at its peak. 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 Inc (NFLX US, BUY, TP US$399)
- Planning US$7-US$9 per month for ad-supported tier. Netflix is planning to price its new ad-supported subscription tier at around US$7-US$9 per month (vs standard plan ~US$15.50), offering a customer-friendly low load (~4 mins per hour) of ads in the initial stages. Rival Disney+ ad-supported plans are priced at US$7.99 per month.
- Streaming takes top spot in US TV usage. According to a July 2022 report by Nielsen, streaming platforms as a share of total TV usage in the US increased about 1.1% MoM to 33.7%, edging out other traditional segments like cable (34.4%) and broadcast TV (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 MoM increase of about 0.3%.
Comment: 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. 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.
Alphabet Inc (GOOGL US, BUY, TP US$139)
- Fined A$60mn by Australian regulators for misleading users. Regulators in Australia 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.
- Fitbit announced 3 new devices set to ship later this month. Alphabet’s Fitbit unit 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.
Comment: Big Tech continues to be monitored very closely by regulators around the world, with Alphabet no exception to this. The latest fine by Australian regulators is just another example of attempts to keep Big Tech in check. 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. We do believe that this industry will continue to grow in the long-term, especially as consumers focus more on their mental and physical well-being.
Microsoft Corp. (MSFT US, BUY, TP US$332)
- Activision Blizzard deal faces in-depth scrutiny. Microsoft’s pending US$69bn acquisition of gaming giant Activision Blizzard will face 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 8 Sep 22 to come to an acceptable agreement with the regulator. If the companies do not provide suitable remedies, the deal would be automatically referred to an in-depth investigation.
Comment: We believe that strong corporate demand for premium E5 licenses will continue to grow given the increasing cybersecurity attacks. 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.