Evaluating Tech Titans: How FAANG companies are navigating the new economic cycle

By Yogesh Kansal 

For any investor worth his salt, it is truly difficult to resist being overawed by the financial vigour, R&D muscle and mould-breaking capabilities that FAANG companies live up to, quarter after quarter. Little wonder, then, that four letters out of the FAANG abbreviation are also part of the ‘Magnificent Seven’ in US equity markets.

For those who might not be in the know, financially, the title, ‘Magnificent Seven’ includes seven tech bigwigs, namely, Tesla, Amazon, Apple, Microsoft, Nvidia, Meta and Alphabet (Google). Remove Tesla, Microsoft and Nvidia from the Magnificent Seven and add Netflix to the mix, to get FAANG companies.

The Magnificent Seven companies, alone, comprised 28% of the weighted market cap of the S&P500 by the end of 2023. However, the FAANG companies are no lightweight contenders themselves.

Barring Netflix and Meta, all the other FAANG companies have a market capitalisation that runs over 1 trillion. Apple, for instance, is the market leader with a capitalisation of a little over $3 trillion. Amazon clocks in a market cap of a neat $1.52 trillion, with Alphabet leading a little ahead with $1.72 trillion.

If you only strain your ears a little, you can almost hear the other companies in the S&P500 grumble about suffering in the shadow of Big Tech. These bigwigs pull in large sums, and also manage to deliver some stellar returns for investors. Google Class A shares, for instance, have secured 53.37% for investors in the last 1 year. Amazon has topped that with 74% returns, and Meta has hit it out of the park with returns of a whopping 165%.

What lies ahead for FAANG?

Amazon: The e-commerce marketplace delivered a strong set of quarterly numbers in December. Its net profit for the quarter stood at $10.6 billion, the highest in the last two years, and revenue jumped up by 14% to $170 billion. The top and bottom lines, both, exceeded market estimates. Contributing to rising sales in the company is Amazon’s cloud-computing arm Amazon Web Services. AWS’ revenue increased by 13% to $24.2 billion, and its operating profit grew by almost 38%.

Till recently, Amazon was lagging in the AI race as far as competing with Google and Microsoft is concerned. However, Amazon is bringing its A-game to the table with its investment in an AI startup called Anthropic. Amazon also launched an AI chatbot in November called Amazon Q.

Amazon is also planning the launch of an AI-operated shopping assistant called Rufus on its app, which will help customers have a refined shopping experience. Amazon’s Chief Financial Officer did not disclose what percentage of AWS sales were being secured by Amazon’s AI capabilities. However, he told the media that AWS revenue growth will accelerate in the new FY and that corporate customers have shown interest in operating their generative AI applications on AWS.

Alphabet: Google reported $65.5 billion of total ad sales in the last quarter of FY23 leapfrogging by 11% on a year-on-year basis. However, that wasn’t enough to enthuse the markets and the stock took a tumble after the results.

For the December quarter, Google’s sales in its cloud-computing business shot up by 26% to $9.2 billion kindling hope that the situation is not as dismal in the AI services space as the revenue numbers in the September quarter led one to believe.

Chief Financial Officer Ruth Porat indicated that AI’s contribution to the growth in the cloud computing segment was increasing, although she did not divulge specific numbers.

As a tech flagbearer, how the AI space performs in the coming months will be, to a very large extent, dependent on what comes out of the Google stable. One often keeps on hearing about the paradigm-changing products that are being tinkered with their research labs. The need, now, is to launch these products soon, and put them on the assembly lines.

Google vs Microsoft on the AI front: Google also has its hands full battling the impression that it is falling behind in the AI race with Microsoft. Microsoft’s cloud revenue business notched up 23% gains for FY23, and stood at a towering $124.3 billion.

Analysts’ forecasts are also a whole lot brighter for Microsoft than Google. Microsoft is projected to have an operating margin of 43% in the March quarter, while Alphabet, Google’s parent company, is likely to have an operating margin of 28%.

Meta: Meta had a smashing start to the new year. The parent company of Facebook reported the highest quarterly sales in the last two years and is all set to disburse a dividend payout of 50 cents per share.

If that wasn’t good news enough for investors, the company has also laid the groundwork for an expanded share buyback programme running into $50 billion. For the December quarter, Meta’s revenue surged by 25% to $40.11 billion on an annual basis. Another cause for cheer for Meta investors would be the elevated capex slated to be incurred for FY24, which is likely to be in the range of $30-37 billion, a jump up of $2 billion in the range that was previously anticipated.

Heartening to note is that Meta is laying the roadmap for future growth. Chief Financial Officer Susan Li said the future growth will be driven by investments in AI and non-AI hardware as well as data centres.

Meta reported a total of 3.19 billion active users across several of its platforms including Facebook, Instagram, WhatsApp and Messenger. This number stood at 3.14 billion in the September quarter.

A critical factor undergirding Meta’s revenues is the predominant place occupied by advertising. Ad income made up for 96.5% of the revenue for Meta in the December quarter. Interestingly, revenue growth of the parent company can be mapped to the growth of ad prices. Average ad prices grew by 2% year-on-year. In the December 2022 quarter, average ad prices had decreased by 22%.

Meta has been rebranding its AR/VR products but how the success of these products will be, in a way, be determined by the product rollout from Apple. Despite the stiff competition that Apple will, in all likelihood, pose, Meta still enjoys a clear edge given the treasure trove of data it possesses.

Apple: The company has been delivering respectable quarterly results. In the latest quarter, the iPhone manufacturer posted a revenue of $120 billion, up 2.1% on a y-o-y basis. The net income also grew by 13% to $34 billion.

However, the real dampener came from China. Revenue from China, Apple’s third largest market, declined by close to 13% to $21 billion. It didn’t help that in September, the Chinese government directed central government employees to not use iPhones.

A lot of retail investors are pinning hopes of revenues rising on the back of the new Apple Vision Pro, a virtual-reality handset. The success of Vision Pro can flag off the next round of technological evolution in our communication medium. It may also be another catalyst that could not only push Apple’s stock price higher not just this year but in the coming years as well.

(The author is Yogesh Kansal – Cofounder and CMO, Appreciate, and the views expressed in this article are his own)