BIGTECH WEEKLY | Too High? Amazon Says No!

Big-Tech’s Performance

It is a week of pullback, although most companies recorded beat in earnings season, there were differences in performance between individual stocks, which was unexpected by investors.

As of the close on August 3rd (excluding August 4th), the strongest performer of the week was $Amazon.com(AMZN)$ which performed well after its earnings report and rose 6.02%. The other companies all experienced a retreat, with $Tesla Motors(TSLA)$ down 2.23%, $Alphabet(GOOG)$ down 2.42%, $Microsoft(MSFT)$ down 2.65%, $Meta Platforms, Inc.(META)$ down 3.45%, $NVIDIA Corp(NVDA)$ down 4.29%, and $Apple(AAPL)$ down 4.38%.

Big-Tech’s Top Newsfeed

• Apple announced its FY23Q3 earnings report, with revenue declining for three consecutive quarters, but service revenue reaching a historic high and operating cash flow exceeding expectations. The Indian market also saw double-digit percentage growth.

• Guo of TF Securities believes that there is no indication that Apple will integrate AI edge computing with its hardware products by 2024.

• Elon Musk plans to negotiate with Apple to reduce the App Store commission.

• SoftBank and Microsoft will collaborate on developing artificial intelligence software in Japan.

• The $LONDON STOCK EXCHANGE GROUP PLC(LSE.UK)$ is partnering with Microsoft to develop an artificial intelligence model.

• Amazon's Q2 earnings report was better than expected, with strong guidance for Q3 and the full year.

• Amazon plans to merge various e-commerce supermarkets, including Whole Foods Market, which it acquired.

• AWS has officially launched generative AI and HPC application services driven by Nvidia H100 Tensor Core GPU drivers.

• Google has released a visual language action AI model to train robots to throw away garbage.

• Tesla has acquired German wireless charging technology company Wiferion.

• Uber has purchased 100 Tesla Model Y electric vehicles.

• Wu Xinzhou, head of intelligent driving at $XPeng Inc.(XPEV)$ will leave the company, with Nvidia as a possible next destination.

• $Advanced Micro Devices(AMD)$ is considering adjusting chip specifications, following in Nvidia's footsteps, in order to maintain exports to China. Its earnings report also brought good news to the market.

Big-Tech’s Key insights

Apple: No surprises, becoming unexpectedly surprise.

Looking at Apple's Q3 FY23 report, hardware sales were ordinary, and the revenue was mainly supported by software services. Overall, the revenue has declined for three consecutive quarters, and the company has not provided guidance. However, based on market expectations, it is not surprising if the revenue also declines year-on-year in the next quarter.

Nevertheless, due to the higher profit margin from service revenue, the company's overall profitability has increased. As a result, the operating cash flow exceeded market expectations, reaching $26 billion for the quarter. Our observations are as follows:

• The iteration cycle of hardware products is stable, and without significant innovations, incremental growth will rely on price increases. Therefore, there might be a possibility of price hikes for iPhone 15.

• Service revenue is currently the main driver of Apple's growth, making it unlikely for them to yield to any talks of reducing fees in the "App Store," much like Musk's demands. This is also a guarantee for future performance. However, we must acknowledge that this could be a potential concern in the long run, as Europe has its antitrust measures, and China has its consumer protection practices. There will always be some consumers who find fault with strict policies.

• Apple shows considerable restraint with AI. Although Apple views AI as crucial for its products, they are more likely to announce them when products are launched, meaning they are already mature by the time they are released.

• The Vision Pro is hard to predict. But that doesn't necessarily mean it won't sell well. This is a relatively innovative product and might become a key contributor to the company's performance in 2024.

• With $166 billion in cash and marketable securities and net cash of $57 billion after deducting total debts of $109 billion, Apple can still comfortably carry out dividends and buybacks.

The market's reaction might be driven by higher expectations for Apple, along with the recent high overall market gains and relatively high premium rates, making a temporary correction unsurprising.

Apple Q3: Too high to touch!

Amazon: Refuting "Recession Rumors" with Strong Guidance.

Amazon released its Q2 financial report, and its stock soared over 10% after hours. Previously, the market had priced in too many "recession expectations," putting pressure on the stock price. However, this time, the company's improved profit margin and an upward revision of its Q3 and full-year guidance have restored market confidence.

Our observations are as follows:

• The main e-commerce business still outperformed market expectations and regained growth momentum despite inflation. Third-party retail, especially after price increases, showed impressive results, with offline stores surpassing $5 billion for the first time.

• The advertising business performed remarkably well, significantly exceeding expectations and surpassing $100 billion for the first time, with the highest growth rate and high-profit margins contributing to the overall profitability of the company. However, there are concerns about monetization rates.

• AWS growth continued to slow down, but it remains the market leader. The company is now looking toward the applications of AI in the era of AI, believing that data is at the core of artificial intelligence.

• Due to varying revenue growth rates across different business segments, gross profit margins have notably increased. At the same time, cost-cutting measures are showing results, with the operating profit margin returning to 5.7% after seven quarters, providing a foundation for further improvement in future profit margins.

Previously, the market overemphasized recession expectations, thinking that inflation might have a significant impact on the company's performance. However, recent developments proved these concerns to be somewhat excessive. The company's strong improvement in Q3 performance further demonstrates the continued recovery of its retail business and boosts its valuation.

Can Amazon's Q2 Earning Be The Savior?

Fitch Downgrades U.S. Bond Rating, Will it have a Major Impact?

The stock market experienced a pullback this week due to an important news item – Fitch's criticism of the excessive political infighting, overspending, and tax cuts in the U.S., which have led to numerous uncertainties in the country's fiscal system.

We believe that Fitch aims to remind investors of the risks, but judging from economic data and other indicators, it is still too early to assert that the U.S.'s debt-paying ability is in jeopardy. Additionally, major holders of U.S. bonds are unlikely to be forced to sell their holdings due to rating changes. Looking at the secondary market performance, though there were minor fluctuations in U.S. bonds, there were no significant impacts. The fluctuations in the secondary market are more likely related to liquidity and supply-demand situations.

Since the U.S. government raised the debt ceiling, it will increase the long-bond tender amount starting next week, and the net borrowing scale for this quarter from July to September is raised to $1 trillion, disrupting the current supply-demand balance in the bond market. This also implies that the market will need to absorb the excess liquidity. The impact on the stock market is more related to liquidity.

With the conclusion of the major tech companies' financial reports, more investors will rebalance their portfolios, and some will choose to take profits from positions that have performed well this year, leading to a certain level of correction demand.

The Big-Tech Portfolio

We combine the seven companies with the highest weights into an investment portfolio, which we call the "TANMAM" portfolio.

If we backtest this portfolio using equal weighting and quarterly rebalancing since 2015, the performance has far exceeded the S&P 500, with a total return of 1523.9%, while the S&P 500 ETF (SPY) returned 257.0% during the same period.

The annualized return is 37.76%, surpassing SPY by 11.77%.

Since 2023, the return has been 95.85%, compared to SPY's 20.62%