Sub-sector: Technology
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Fundamental View
AS OF 28 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet.
We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Business Description
AS OF 28 May 2024- Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
- Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.36 bn as of 31 March 2023.
- In 1Q24, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 33% came from FinTech and Business Services (e.g. commercial payments and cloud), 17% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.6 tn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While Chinese regulators have adopted a more friendly stance towards tech companies, any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past.
Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
Key Metrics
AS OF 28 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 25.2% | 27.0% | 31.4% | 29.8% | 29.0% |
Net Debt to Book Cap | 4.0% | 6.0% | 8.5% | 1.0% | n/m |
Debt/Total Equity | 33.7% | 36.9% | 45.9% | 42.5% | 40.8% |
Debt/Total Assets | 19.7% | 20.1% | 22.8% | 23.5% | 22.7% |
Gross Leverage | 1.4x | 1.7x | 1.9x | 1.6x | 1.5x |
Net Leverage | 0.2x | 0.4x | 0.5x | 0.1x | n/m |
Interest Coverage | 24.8x | 24.7x | 19.0x | 19.9x | 20.5x |
EBITDA Margin | 38.3% | 34.9% | 34.3% | 38.9% | 40.2% |
CreditSights View
AS OF 15 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet. We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Recommendation Reviewed: May 15, 2024
Recommendation Changed: August 18, 2022
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Business Description
AS OF 28 May 2024- JD is one of China's leading e-commerce and retail infrastructure service providers.
- JD has a large fulfillment infrastructure which includes over 1,600 warehouses operated by the company, and and 2,000 cloud warehouses operated by third-party warehouse owner-operators under JD Logistics Open Warehouse Platform. Its warehouse network had an aggregate gross floor area of approximately over 32 mn square meters, as of 31 December 2023.
- JD has 4 operating segments, namely JD Retail, JD Logistics, Dada and New businesses. Dada began reporting as a standalone segment with effect from 28 February 2022.
- New businesses mainly include JD Property, Jingxi business group, CNLP, overseas businesses and technology initiatives.
- JD had a market capitalization of RMB 335.6 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While Chinese regulators have adopted a friendlier stance towards tech companies, any regulatory clampdowns may still adversely affect the business of JD (e.g. antitrust rules, data security & personal data protection laws).
Intensifying competition amongst Chinese eCommerce platforms with the entrance of new live-streaming/short-form video platforms and group buying discount platforms may result in slower topline growth and weaker EBITDA margins for JD as its increase its user/merchant incentives and promotional activities to defend its market share.
There are regulatory risks involving the use of variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs). Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
JD cooperates with 3rd party logistics cos to help deliver products to buyers. Failure to provide reliable delivery services or unexpected logistics bottleneck may materially affect the business.
Key Metrics
AS OF 28 May 2024RMB mn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 12.5% | 12.2% | 19.2% | 18.8% | 19.6% |
Debt/Total Equity | 14.2% | 13.8% | 23.7% | 23.1% | 24.3% |
Debt/Total Assets | 7.5% | 6.9% | 10.9% | 10.9% | 11.6% |
Gross Leverage | 1.4x | 1.8x | 1.9x | 1.5x | 1.5x |
Interest Coverage | 20.1x | 16.1x | 16.3x | 15.5x | 16.3x |
EBITDA Margin | 3.0% | 2.0% | 3.3% | 4.1% | 4.3% |
CreditSights View
AS OF 17 May 2024We maintain our Market perform recommendation on JD (Baa1/A-/NR) post its largely in-line 1Q24 revenue. Growth accelerated on a pick up of general merchandise sales, marketing and logistic service revenues. Gross/EBITDA margin improved and FOCF narrowed on lower capex. Net cash position shrank as the company used internal cash to fund share buybacks. We expect the intense competition among Chinese eCommerce platforms to cap revenue upside and pressure EBITDA margin in FY24; we expect continued strong positive FOCF, but the bulk would be used for shareholder rewards, resulting in flat Total debt/EBITDA and net cash position. We continue to prefer Alibaba and Tencent (especially the 10-20Y part) among A-rated China tech. We think JD’s 2050 is relatively more attractive.
Recommendation Reviewed: May 17, 2024
Recommendation Changed: November 21, 2022
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Fundamental View
AS OF 28 May 2024We maintain our Market perform recommendation on Baidu (A3/NR/A) post its uninspiring 1Q24 results. 1Q24 topline growth decelerated to 1.2% YoY as the core advertising slowed and revenues from iQiyi contracted YoY on a falling number of subscribers. 1Q24 EBITDA margin was stable 28.9%. Baidu’s Total debt/EBITDA weakened, FOCF dropped YoY due to higher capex, and net cash position narrowed from YE23. We see limited earnings upside due to the intense competition of the domestic ads market and largely homogeneous competition; we do not expect its AI-related initiatives to translate to better topline and Margin in FY24.
We continue preferring Tencent and Alibaba among A-rated China tech. We prefer Baidu 2030s.
Business Description
AS OF 28 May 2024- Founded in 2000, Baidu started out as a search engine business and began its development into artificial intelligent (AI) since 2010.
- Baidu Core is the main revenue driver of the company (75% of 1Q24 revenues) which provides search-based, feed-based and other online marketing services (total: 54% of 1Q24 revenues), as well as products and services from new AI initiatives (22% of 1Q24 revenues); Baidu's AI initiatives include AI cloud (enterprise & public sector cloud, and personal cloud), Intelligent Group Driving (Apollo Go, Apollo auto solutions, and intelligent EVs under Jidu Auto), Mobile Ecosystem (Baidu App, ERNIE Bot, Haokan and Baidu Post), and other growth initiatives (ie. Xiaodu smart devices powered by DuerOS smart assistant and AI chips).
- iQiyi accounts for the remaining revenues of Baidu; iQIYI is an online video platform with a content library that includes licensed movies, television series, cartoons, and other programs.
- Baidu launched ERNIE bot in Mar-23, a generative AI chatbot powered by ERNIE, Baidu's in-house foundation model.
- Baidu has a market capitalization of RMB 254.7 bn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024Any regulatory clampdowns abroad and domestically (e.g. potential US investment ban, antitrust rules, data security and personal information protection laws) may adversely affect the business of Baidu. The interpretation of Chinese laws and regulations involves some degree of uncertainty.
There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Baidu has made significant investments into long-term AI-related projects, which may take time to turn profitable. A potential escalation of the US chip restriction could have a material negative impact its AI related business (ie. cloud, ernie bot, autonomous driving).
Key Metrics
AS OF 28 May 2024RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 30.4% | 29.7% | 28.5% | 25.0% | 25.7% |
Debt/Total Equity | 43.8% | 42.2% | 39.8% | 33.4% | 34.7% |
Debt/Total Assets | 24.8% | 24.1% | 23.4% | 20.8% | 21.6% |
Gross Leverage | 2.7x | 3.3x | 2.8x | 2.2x | 2.3x |
Interest Coverage | 9.8x | 8.2x | 11.4x | 12.1x | 12.3x |
EBITDA Margin | 28.5% | 22.6% | 26.8% | 29.2% | 29.2% |
CreditSights View
AS OF 17 May 2024We maintain our Market perform recommendation on Baidu (A3/NR/A) post its uninspiring 1Q24 results. 1Q24 topline growth decelerated to 1.2% YoY as the core advertising slowed and revenues from iQiyi contracted YoY on a falling number of subscribers. 1Q24 EBITDA margin was stable 28.9%. Baidu’s Total debt/EBITDA weakened, FOCF dropped YoY due to higher capex, and net cash position narrowed from YE23. We see limited earnings upside due to the intense competition of the domestic ads market and largely homogeneous competition; we do not expect its AI-related initiatives to translate to better topline and Margin in FY24; we continue preferring Tencent and Alibaba among A-rated China tech. We prefer Baidu 2030s.
Recommendation Reviewed: May 17, 2024
Recommendation Changed: August 31, 2022
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Fundamental View
AS OF 15 Apr 2024- We maintain our Outperform recommendation on Alibaba (A1/A+/A+) post its F3Q24 results. Topline growth decelerated to 5.1% YoY, and missed estimates by 0.4 ppt. EBTIDA margins declined on lower monetization rates and expanding losses of its international eCommerce segment. FOCF declined but Alibaba’s balance sheet remained rock solid, and its net cash position expanded. Over the next few quarters, we expect Alibaba’s topline growth to pick up but EBITDA margin to remain under pressure; we expect its strong FOCF generation to continue to support its credit profile; we see limited downwards rating pressure on Alibaba over the next 6-12 months.
- We continue to prefer holding longer-dated Alibaba $ bonds (7-20Y) for carry, and will wait for market pullbacks to add.
Business Description
AS OF 15 Apr 2024- Founded in 1999, Alibaba is the largest retail commerce company in the world based on gross merchandise volume (GMV) as of 31 March 2023.
- The company's business segments comprise Taobao & Tmall Group (46% of F2Q24 revenue; China e-commerce incl. Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com), International Digital Commerce (10%; incl. Lazada, AliExpress, Trendyol and Daraz), Cloud Intelligence Group (11%; incl. AliCloud, AI), logistic provider Cainiao (10%), Local Consumer Services (5%; incl. Ele.me, Amap), and Digital Media and Entertainment (2%, incl. Youku & Alibaba Pictures) and Others (17%; incl. Freshippo, Fliggy, Alibaba Health, Intelligent Information Platform, SunArt, DingTalk).
- Taobao/Tmall is Alibaba's core business and the main EBITA & cash generation unit of the group. Alibaba's annual active consumer exceeded 1 bn in June-2022. In FY23, Alibaba's China retail marketplaces added 50 million annual active consumers.
- Alibaba had a market capitalization of RMB 1.31 tn as of 15 April 2024.
Risk & Catalysts
AS OF 15 Apr 2024- While Chinese policymakers have adopted an increasingly friendly stance towards tech platfoms, regulatory clampdown (e.g. anti-monopoly guidelines, data security laws, personal information protection laws) may still affect Alibaba as it increases compliance cost. There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
- Alibaba does not control Alipay but relies on Alipay to conduct substantially all the payment processing and escrow services on its marketplaces.
- Alibaba may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit, or illegal.
- Intensifying competition amongst eCommerce platforms may result in slower topline growth and weaker EBITDA margins for Alibaba as its increase incentives and promotional activities to defend its market share.
Key Metrics
AS OF 15 Apr 2024CNY BN | FY20 | FY21 | FY22 | FY23 | LTM F3Q24 |
---|---|---|---|---|---|
Debt to Book Cap | 12.5% | 12.1% | 11.6% | 12.6% | 12.7% |
Debt/Total Equity | 14.3% | 13.8% | 13.1% | 14.4% | 14.5% |
Debt/Total Assets | 9.6% | 8.8% | 8.3% | 9.2% | 9.1% |
Gross Leverage | 0.8x | 0.8x | 0.9x | 0.9x | 0.9x |
Interest Coverage | 30.4x | 39.9x | 32.2x | 29.6x | 25.6x |
EBITDA Margin | 30.9% | 24.9% | 18.5% | 20.2% | 20.7% |
CreditSights View
AS OF 15 May 2024We maintain our Outperform recommendation on Alibaba (A1/A+/A+). Its F4Q24 results were mixed with a beat of topline growth on strong domestic/international eCommerce and cross-border logistic businesses, but the company recorded weaker EBITDA margin and FOCF. Debt metrics were stable in F4Q24 but net cash position contracted. We expect Alibaba’s topline growth, EBITDA margin and FOCF to trend lower in FY25 but to maintain moderate leverage and a flat net cash position. We continue to see value in Alibaba compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Alibaba’s curve (37,41) as a core holding for investors looking to add duration in the Asia credit space.
Recommendation Reviewed: May 15, 2024
Recommendation Changed: August 05, 2022
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Fundamental View
AS OF 11 Mar 2024Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group’s leading position will be bolstered in 2023/24 as legacy media companies rein in spending and international ambitions.
From a financial perspective, we expect Netflix will deliver double-digit EBITDA growth in 2023/24 driven by a re-acceleration in subscriber growth.
Netflix’s financial policy is relatively conservative. $5+ bn of FCF and target gross debt of $10-15 billion equates to strong IG metrics.
Business Description
AS OF 11 Mar 2024- NFLX is the world's leading subscription streaming entertainment service with ~260 mn paid streaming subs in 190+ countries around the world. NFLX's programming includes original & acquired TV series, documentaries and feature films.
- NFLX began expanding internationally with the launch of services in Canada (Sep 2010), followed by LatAm (Sep 2011), and the UK and Ireland (Jan 2012). NFLX launched services in 17 more markets at a measured pace through the end of 2015 before launching in the rest of the world in Jan 2016 (ex-China, N Korea, Syria, Crimea).
- At the end of 4Q23, Netflix's regional subscriber breakdown was as follows: (1) EMEA - 88.8 mn; (2) UCAN - 80.1 mn; (3) LATAM - 46.0 mn and (4) APAC - 45.3 mn.
- Ted Sarandos and Greg Peters are Co-CEOs, with Mr. Sarandos appointed to the position in July 2020 and Mr. Peters in January 2023. Co-founder Reed Hastings was appointed as executive chairman of the Board in January 2023.
Risk & Catalysts
AS OF 11 Mar 2024Market Saturation: Netflix is highly penetrated in the US market, so future growth will become increasingly dependent on price increases, uptake of the ad tier and success on the password sharing crackdown. The recent WWE deal also opens the door to higher-priced sports programming.
Increased Competition: Several large competitors including Amazon and Apple are increasingly leaning into DTC video offerings on a global basis. Heightened competition may result in rising churn & declining gross additions for NFLX.
M&A Risk: Netflix is in the early stages of an expansion into video games and has already acquired several studios.
Key Metrics
AS OF 11 Mar 2024$ mn | FY19 | FY20 | FY21 | FY22 | FY23 |
---|---|---|---|---|---|
Revenue | 20,156 | 24,996 | 29,698 | 31,616 | 33,723 |
Revenue YoY % | 27.6% | 24.0% | 18.8% | 6.5% | 6.7% |
EBITDA | 3,113 | 5,116 | 6,806 | 6,695 | 7,650 |
EBITDA Growth | 55% | 64% | 33% | (2%) | 14% |
Cash Content Expense | 14,611 | 12,537 | 17,469 | 16,660 | 13,140 |
CFO - CapEx | (3,140) | 1,929 | (132) | 1,619 | 6,926 |
Dividends/CFO-Capex | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
LTM CFO-CapEx to Debt | (21.3%) | 11.8% | (0.9%) | 11.3% | 47.6% |
CreditSights View
AS OF 19 Apr 2024Netflix’s USD bonds trade like BBB+ paper, but we believe the premium valuation is justified given the group’s leading scale, operating momentum (forecast ~20+ million net adds and ~30+% EBITDA growth in FY24) and credit metrics, which stand in stark contrast to the pressures facing legacy media peers. Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group is on track to extend its leading position as legacy media companies rein in spending and international ambitions and revert to licensing library content to competitors. The company’s gross leverage is already best in class at ~1.5x, and we expect Netflix can generate ~$7 billion of FCF in FY24 with a FCF to debt ratio in the ~50% area.
Recommendation Reviewed: April 19, 2024
Recommendation Changed: October 20, 2022
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Fundamental View
AS OF 07 Feb 2024We continue to be encouraged by the underlying momentum in the Family of Apps business, particularly the strong revenue guidance for 1Q24 which implies an acceleration to 29% YoY growth in constant currency at the high-end. Credit metrics are rock solid with 0.3x gross leverage and $47 bn net cash.
We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and big investments in AI and metaverse, although our best guess is this will be in 2H24 given its increased cash balance and improved FCF generation. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance.
Business Description
AS OF 07 Feb 2024- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising which includes Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 4Q23, Family of Apps was 97% of revenue (96.5% from advertising and 0.8% from other) and Reality Labs was 3% of revenue. Reality Labs generated $16.1 bn in operating losses during LTM 4Q23 as the company is investing heavily in the metaverse.
- Total MAUs and DAUs are 3,065 mn and 2,110 mn respectively at 4Q23. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue is 46% from US & Canada, 24% from Europe, 19% from Asia Pacific, and 11% from Rest of World.
- Meta is headquartered in Menlo Park, California. Employee headcount was 67.3k at 4Q23.
Risk & Catalysts
AS OF 07 Feb 2024In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
Meta’s Facebook and Instagram are exposed to rising competition from TikTok and other social media platforms. Meta has cloned TikTok’s short-from video with Reels. The US has threatened to ban TikTok unless its Chinese owners divest its stake.
Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory changes (e.g., Section 230 protections).
In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although it was on the friendly-side of activism and some suggestions have already been implemented.
Key Metrics
AS OF 07 Feb 2024$ mn | 2019 | 2020 | 2021 | 2022 | LTM 4Q23 |
---|---|---|---|---|---|
Revenue YoY % | 26.6% | 21.6% | 37.2% | (1.1%) | 15.7% |
EBITDA | 34,562 | 46,069 | 63,882 | 49,622 | 71,955 |
EBITDA Margin | 48.9% | 53.6% | 54.2% | 42.6% | 53.3% |
CapEx % of Sales | 22.1% | 18.3% | 16.3% | 27.5% | 20.8% |
Sh. Ret. % of CFO-CapEx | 20% | 27% | 116% | 152% | 46% |
Net Debt | (54,855) | (61,954) | (47,998) | (30,815) | (47,018) |
Gross Leverage | 0.0x | 0.0x | 0.0x | 0.2x | 0.3x |
EV / EBITDA | 15.5x | 15.8x | 14.0x | 5.8x | 12.3x |
CreditSights View
AS OF 25 Apr 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.2x gross leverage and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is poised to go through a heavy investment cycle for both AI and the metaverse, and also significantly stepped up its shareholder returns in 1Q24. We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments in AI and metaverse. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta does have legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Recommendation Reviewed: April 25, 2024
Recommendation Changed: April 18, 2024
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Fundamental View
AS OF 11 Aug 2023- We continue to have confidence in CEO Andy Jassy and the company’s long-term business for both AWS and consumer. The 2Q23 results support our view as AWS growth is stabilizing and the North America consumer segment significantly improved its GAAP operating profit. AWS customers are shifting from workload optimizations to new workload deployments, and we expect AWS to remain a profitable growth driver for the foreseeable future.
- We anticipate the North America segment to see continued profitability improvements driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. Gross leverage declined by nearly 2 ticks to 0.8x or 1.6x on a lease-adjusted basis. Also, Amazon’s equity cushion is ~$1.4 tn.
Business Description
AS OF 11 Aug 2023- Amazon is an e-commerce company which sells a wide range of its own products and those of 3rd party sellers. Amazon offers fulfillment services for 3rd party sellers (FBA) and sells cloud computing services (AWS). In 2Q23, 3rd party units were 60% of total paid units, and FBA units are a majority of 3rd party units.
- In LTM 2Q23, NA segment was 62% of sales, International was 22% of sales, and AWS was 16% of sales.
- Amazon disclosed it surpassed 200 mn Prime members in April 2021. The annual membership was increased in February 2022 from $119 to $139 in the US, although fees vary by country. In mid-2019, Amazon Prime began to transition from 2-day to 1-day shipping. Amazon Prime also offers Prime Video, streaming music, and other benefits.
- In 2006, Amazon launched AWS which remains the leader in cloud computing (IaaS/PaaS). Amazon sells its own devices (e-reader, smart speaker, streaming media player, etc.).
Risk & Catalysts
AS OF 11 Aug 2023- We think Amazon has moderate event risk as its large size (~$1.4 tn market cap) provides a buffer against the regulatory risks.
- Amazon has taken steps to improve profitability including multiple rounds of layoffs which could preempt activist investor campaigns that have become more common lately for Big Tech including GOOGL and META.
- Amazon continues to face regulatory scrutiny. The FTC is finalizing a lawsuit alleging AMZN disadvantages third-party merchants who do not use its services. The biggest risk would be a breakup, although we view that as unlikely.
- Amazon’s $14 bn acquisition of Whole Foods has shown its proclivity for large M&A, although the regulatory environment could make large deals challenging e.g., FTC scrutiny on its $8.5 bn MGM acquisition.
- Amazon repurchased $6.0 bn shares in 1H22, which were the first buybacks in 10 years, although the company has not repurchased any shares since then.
Key Metrics
AS OF 11 Aug 2023$ mn | 2019 | 2020 | 2021 | 2022 | LTM 2Q23 |
---|---|---|---|---|---|
Revenue YoY % | 20.5% | 37.6% | 21.7% | 9.4% | 10.7% |
EBITDA | 43,394 | 57,284 | 71,994 | 74,593 | 87,648 |
EBITDA Margin | 15.5% | 14.8% | 15.3% | 14.5% | 16.3% |
CapEx % of Sales | 4.5% | 9.1% | 11.8% | 11.3% | 10.0% |
Sh. Ret. % of CFO-CapEx | 0% | 0% | 0% | (52%) | 0% |
Net Debt | (30,201) | (50,497) | (44,771) | 7,316 | 7,902 |
Gross Leverage | 0.6x | 0.6x | 0.7x | 1.0x | 0.8x |
EV / EBITDA | 20.8x | 28.3x | 23.3x | 11.7x | 15.6x |
CreditSights View
AS OF 21 Dec 2023We continue to have confidence in CEO Andy Jassy and the long-term business for both AWS and consumer. The 3Q23 results support our view as AWS growth has stabilized, AWS and North America both had record profits, and International nearly reached breakeven profitability. We expect AWS to remain a profitable growth driver for the foreseeable future, and the North America segment to see improved profitability driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. We estimate gross leverage declined sharply to 0.6x or 1.4x on a lease-adjusted basis. We think Amazon should be able to address the FTC’s concerns with behavioral remedies and fines, and we view a breakup as unlikely.
Recommendation Reviewed: December 21, 2023
Recommendation Changed: December 21, 2023
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