• The FAANGM declined 6% while the S&P 500 fell 4% in February. FB and NFLX that reported weak guidance in the recent quarter, continued to underperform, declining 35% and 14% respectively.
• Highlights during the month were geographic expansion by Meta’s Reels, higher priced iPhones from Apple, Netflix making further strides into gaming content and Alphabet’s major acquisition of a cybersecurity company.
• We remain OVERWEIGHT on FAANGM. Ceasing business in Russia will have little direct impact to FAANGM earnings (Figure 1). The highest exposure is Meta at around 1.5% of revenue. Our preferred picks are AAPL, AMZN, GOOGL and MSFT. On the hardware side, AAPL and AMZN will benefit from the continued easing of supply chains and labour shortages. AMZN will also start seeing easier comparisons as the pandemic demand spike was not as large in 2021. For software, increased cybersecurity priority amid the Russia-Ukraine conflict should push up demand for MSFT’s higher-end licenses. And for the internet, GOOGL is still benefiting from digital advertising tailwinds.

Review

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

• Expanding Facebook Reels goes into more than 150 countries. Meta has begun rolling out Reels to more than 150 countries worldwide, with several feature upgrades set to entice users and content creators alike. We do think that this rollout should help the company better compete with TikTok and other short-form video centric platforms, especially with increasing competition placing downward pressure on user growth.
• Restrictions on both ends from conflict with Russia. In retaliation to Facebook’s initial move to restrict access for Russian state-owned media, the Russian government has cut off all access to Facebook in the country. This move should result in a negative effect on user growth and digital ad sales in Russia.

Comment: Roll out of Reels to more countries should help Meta combat user attrition to its competitors, while also providing more monetization opportunities for advertisers. Restrictions in Russia will definitely hurt user growth in the country, as well as limit digital ad sales.

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

• New products to hit stores on 18 March. At the Apple 2022 Event, an array of new products were announced. The main attraction was the new third-generation iPhone SE, Apple’s entry level smartphone, which will be priced at US$429, up from US$399. This was likely due to supply chain shortages. The big new feature is 5G connectivity. Other new products include the fifth-generation iPad Air, the M1 Ultra chip for the Mac and the new Mac Studio.
• New tap-to-pay service a new growth driver. The recently announced service will allow businesses and retailers to use iPhones to accept Apple Pay, contactless credit and debit cards as well as other digital wallets without any other hardware necessary. This will disrupt the prevalent Point-of-Sale systems and potentially take share from Block Inc which generates US$17bn in revenue, about 4% of Apple’s revenue.
• App Store remains under scrutiny. The US Senate Judiciary Committee voted 20-2 to advance legislation to allow developers to sidestep Apple’s App Store by allowing “sideloading” of software onto iPhones outside of its App Store, or letting apps use the store but skip Apple’s in-app payment system. Apple continues to warn that the bill would hurt user privacy and security. Apple collects a 30% fee on sales made through its App Store.

Comment: On the supply side, Apple’s supply chain dominance allowed them to launch a slew of new products. 4G phones are facing more component shortages than Apple’s premium 5G devices. On the demand side, however, we’re starting to see more competition in China from local OEM foldable phones. 5G penetration in China is also high at 82%, which could point to a slowing of smartphone upgraders. China contributed 21% to 1Q22 revenue.

Amazon Inc (AMZN US, BUY, TP US$4,079)

Comment: Amazon announced a 20 to 1 stock split on 11 March and effective 6 June. The move will make the shares more accessible to retail investors. The company will also buy back US$10bn in shares, replacing the previous US$5bn repurchase program from 2016.

Netflix Inc (NFLX US, BUY, TP US$673)

• Agreement to buy Finnish mobile game developer for €65mn. In an ongoing effort to boost its mobile games capabilities, NFLX recently announced a deal to purchase Finnish game developer Next Games for € This is in line with NFLX’s commitment to adding an extra dimension of entertainment through gaming for its users.
• Pausing projects and acquistions in Russia. In response to the ongoing conflict and humanitarian issues in Russia, NFLX has decided to pause all production and acquisitions in the country, while also refusing to carry any Russian state-owned channels on its platform. Russia is an underpenetrated market for NFLX and presents a good runway for user growth, with only about 1 million subscribers, compared to an estimated 55 million households.

Comment: Acquisition of Next Games should boost NFLX’s own mobile game development capabilities as it looks to gaming as an additional lever of entertainment for users. The ongoing conflict in Russia presents strong headwinds for growth moving forward.

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

• Agreement to buy cybersecurity firm Mandiant Inc for US$5.4bn. Google entered into an agreement to buy Mandiant for US$5.4bn, or around US$23 per share in cash, representing a 57% premium on its 10-day trailing volume weighted average price, beating out Microsoft who was also interested in the deal.
• Stopped selling ads in Russia. Following in the footsteps of other digital ad sellers, Google has also suspended selling any ads in Russia, covering its search products, YouTube, and outside publishing partners. Google’s turnover in Russia for FY20 was estimated to be around US$790mn, and we expect a revenue loss of at least US$1bn because of these actions.
• Facing new €1bn lawsuit in Sweden over shopping results. Google faces yet another lawsuit surrounding manipulation of its search results to favour its own shopping services, this time from a Swedish comparison shopping service, PriceRunner. PriceRunner is aiming to make Google pay compensation from profits lost in the UK since 2008, and profits lost in Sweden and Denmark since 2013.

Comment: Acquisition of Mandiant is in line with the company’s effort in shoring up its Cybersecurity capabilities. The suspension of selling ads in Russia should present only about a 0.5% loss in potential revenue for GOOGL in FY22e.

Recommendation

We remain OVERWEIGHT on the FAANGM. Our preferred picks are AAPL, AMZN, GOOGL and MSFT. On the hardware side, AAPL and AMZN will benefit from the continued easing of supply chains and labour shortages. AMZN will also start seeing easier comparisons as the pandemic demand spike was not as large in 2021. For software, increased cybersecurity priority amid the Russia-Ukraine conflict should push up demand for MSFT’s higher-end licenses. And for the internet, GOOGL is still benefiting from digital advertising tailwinds.

Source: Phillip Capital Research - 14 Mar 2022