Snap Inc. – Price of opposition.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Twitter is in a better position.

  • A poor set of maiden results highlights that Twitter is actually in a better position because although it is stuck in a niche, it remains unopposed in that niche.
  • Management even had the temerity to laugh off the threat from its much larger and far more powerful rival, Facebook, which is successfully replicating Snap’s innovations to great effect.
  • Q1 17A revenues and adj-EBITDA were $149.6m / LOSS$188.2m slightly below consensus at $158m / LOSS$180m.
  • User numbers also disappointed with 166m daily active users (DaU) compared to consensus at $168m.
  • This is not nearly good enough for a company valued at 31x 2017 EV/Sales which triggered a 23% decline in after-hours trading.
  • The company also burned $155m in cash from operations.
  • Commentators are already drawing the comparison to Twitter, but I do not think that this comparison goes far enough.
  • Twitter is stuck in a niche that it has fully monetised and its attempts to branch out into video are faltering (see here).
  • This means that its outlook for growth remains very bleak.
  • However, in the Digital Life Pie segment of microblogging and related messaging, there is no opposition.
  • This means that once it stops spending money in trying to grow, it should make good but static returns from monetising that niche.
  • Snap Inc on the other hand still has plenty of growth ahead of it but its core business competes head to head with Facebook’s dominant properties of Messenger, WhatsApp and Instagram.
  • This is where the problems begin as Facebook can easily afford to outspend Snap in every instance and has 7.8x more DaUs than Snap does.
  • Both of these businesses are network based where there is an exponential relationship between the value that can be created and the number of connections that the network has.
  • Furthermore, to continue its growth, Snap has to monetise outside of USA as its US ARPU already looks full at $1.81.
  • Outside of the US the relative strength between Facebook and Snap Inc. is even more in Facebook’s favour making Snap Inc.’s task all the more difficult.
  • These results were bad because the company has a very high valuation and then missed expectations rather than anything in particular going wrong.
  • However, Facebook’s announcements and the intentions that it made clear at F8 (see here) are a concern.
  • Consequently, I see no reason to change my position on Snap Inc.’s fundamental outlook or my valuation of $15.4bn or $16 per share in a blue-sky scenario (see here).
  • Given the increasing risks involved, I would not consider buying until the shares were meaningfully below this value.
  • Between the two, Twitter is the better long term investment but given the choice, I would not have either.

Amazon – Show and tell.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Screens help to alleviate digital assistants’ stupidity.

  • I think that the Echo Show is more about addressing the shortcomings of voice interaction with machines than it is about launching a series of new and exciting Digital Life services.
  • Amazon has launched an ugly looking device called Echo Show that is effectively Alexa with a 7 inch screen attached to the front.
  • The form factor is disappointing as even Baidu with no hardware experience managed to come up with a far more appealing looking product (see here).
  • Amazon has also upgraded the speakers to give a louder and richer sound profile but I see this being about giving Alexa another medium with which to communicate with the user given the limitations of voice.
  • The problem is simply that Alexa (and all other others) are far too stupid to be able to hold a meaningful conversation with a user.
  • Google Assistant is currently the best but remains woefully short of what one would consider to be a useful assistant.
  • Digital assistants were designed to replace the human variety but because their intelligence is so limited, they are unable to hold a coherent conversation with the user.
  • Human assistants do not need to use screens to understand requests, relay information and carry out tasks meaning that the perfect digital assistant should not either.
  • Hence, I think that the Echo Show has been created to make up for the huge shortfall in Alexa’s cognitive ability
  • This type of interaction is what RFM refers to as one-way voice where the user asks a question and the results are displayed on a screen.
  • RFM research has found (see here) that the vast majority of all man to machine interactions are one-way voice and with this device, Amazon makes these interactions easier.
  • Furthermore, for those that depend on advertising having a screen also helps to maintain the business model of lacing a Digital Life service such as Search or Social Networking with advertising.
  • Consequently, I think that Google is likely to follow up with a similar product which will take advantage of the fact that the necessary communication apps that the device will use are already installed and ready to use on all new GMS Android compliant devices.
  • In Alexa’s case, it looks like the user will have install another app on his phone in order to communicate with the Echo Show.
  • The Echo Show will come with all of 12,000 Alexa’s skills but these skills have been designed for a device with no screen and so I do not see the screen improving the already very poor user experience that these skills currently offer.
  • At $230 or two for $350, the Echo Show is priced to sell but I think that volumes will be small given that the vast majority of Echo’s shipments are made up by the cheapest member of the family, the $50 Echo Dot.
  • Hence, I do not see a sudden rush by developers to upgrade their existing skills or develop new ones to make use of the screen.
  • This is where Google Assistant has a huge advantage as it has already been designed to run with a screen (smartphones) meaning that adapting to having a screen on the Google Home product should be much easier and much better.
  • I still think that Google Home has the advantage here as it has a much better assistant than Alexa, but its lack of developer support for the smart home is starting to be a real problem.
  • Google really needs to pull its finger out and show developers love, especially as Microsoft looks set launch something similar to Echo Show but using Cortana.
  • I continue to struggle with Amazon’s share price whose valuation I think demands that investors pay for profits that never seem to materialise.

Alibaba – US breakthrough.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Deal with First Data changes the US game.

  • Alipay has struck a deal with First Data Corp. that I think prepares the ground for Alibaba to re-enter Amazon’s home market, the US.
  • Alibaba has already made an attempt to enter the US with 11 Main which was sold less than a year after it launched to OpenSky in what can only be seen to have been an embarrassing early exit.
  • Since that sale, Alibaba has been licking its wounds and as a result has come up with what I think is a far more effective strategy to take on Amazon in its home market.
  • The Trojan horse is Alipay which is actively used by 450m Chinese users whose business, US retailers are keen to attract.
  • Alibaba began by negotiating with each of the retailers individually offering the possibility to sell their products into China as well as attract Chinese tourists to shop.
  • However, this deal moves this strategy into a whole other dimension as once Alipay is fully implemented, it will be accepted by 4m retail outlets across the US.
  • This puts Alipay on par with Apple Pay in terms of outlets covered making it much easier for the 4m Chinese who visit the USA every year to pay for goods and services.
  • Now that Alipay will have very good coverage of US retail, it will then be in a position to encourage US users to use Alipay for their shopping.
  • However, I think that this will be easier said than done as Alipay’s QR code system of payment leaves a lot to be desired when it comes to an easy and fun user experience compared to other offerings in US.
  • I have long believed that this experience is acceptable in China because the alternative, offline experience that it replaces is woefully bad.
  • Therefore, an experience that is mediocre by developed market standards is a huge improvement on the offline experience in China which is why I think QR codes have worked in China but failed in developed markets.
  • However, assuming that Alipay can convince US users to use it, then this would open the path for Alibaba’s e-commerce to return to the US with a much greater chance of success.
  • I think that this is the long-term strategy for Alibaba to expand into overseas markets but in the meantime making it easy for Chinese tourists to spend money abroad is going to do no damage to improving their loyalty when they are at home.
  • While Alipay dominates payments for ecommerce in China, elsewhere it is not so strong and it is WeChat Pay that does very well in that space.
  • Hence, Alipay has a fight on its hands to expand outside of e-commerce and generating loyalty with 4m of its highest spending users will do it no harm.
  • I do not see this as a threat to Apple Pay, due to the ease of use issue, but then I think Apple Pay has usage problems of its own (see here).
  • I continue to struggle with the valuation of Alibaba as I think e-commerce in China is likely to slow by more than many expect and Alibaba has a long way to go to start making real money from its other ecosystem assets.
  • I prefer Baidu or Tencent in China.

Google vs Amazon – Battle of the home.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

The time for Google to move is now.

  • Amazon is far from standing still in its battle to win the smart home meaning that Google really needs to pull its finger out before it suffers a defeat not unlike that suffered by Betamax at the hands of VHS.
  • Amazon is already miles ahead of Google when it comes to devices, with over 10m in the hands of users (compared to Google Home at I estimate, 1m), but it is not stopping there.
  • Last week, Amazon and Conexant announced the availability of the AudioSmart 4-mic development kit.
  • This is a piece of hardware that allows third parties to integrate both the far-field microphone technology that the Echo products use to hear the user as well as the assistant itself.
  • In essence it is an Amazon Echo Dot without the case, being roughly the same size and shape.
  • The idea is that third parties take the kit and integrate it into their own products to provide voice control as well as the ability to control everything else in the house.
  • Ecobee has already taken the plunge by integrating it into its own thermostat and I would not be surprised to see many others follow suit.
  • Amazon has been extremely welcoming to third party developers giving a lot of support as well as meaningful discounts for running their services on AWS.
  • The same cannot be said of Google as almost every developer I have spoken to has not been complimentary when describing the experience of trying to develop for Google Home.
  • I find this to be a big surprise because Google’s Android developer program has been huge and thriving for years.
  • This is why Google suffered such a resounding defeat at CES in January where Amazon Echo was everywhere and Google Home was barely to be seen or talked about.
  • Google must act very quickly as even though it has vastly superior product, it is at risk if being swamped unless it starts to materially improve the number of third party products which can be used with Google Home.
  • Google has its developer conference (Google i/o) on May 17th to May 20th where I will be looking for three things:
    • First, Developer love: Google needs to show creators of smart devices plenty of love and support when it comes to making their products work with Google Home.
    • Second, Google Assistant: Google needs to make the assistant available such that anyone who wants to deploy it on their device can do so easily.
    • Third, hardware: Google should make its microphone array available to anyone that wants to use it.
    • This is more important than one would think as the system needs to able to hear the user from far away even with background noise.
    • This requires some specialised microphones and is important when it comes to delivering a good user experience to ensure engagement and traffic generation.
  • I still think that smart home is Google’s to lose but unless there is real movement in this direction at Google i/o, I fear that by next year, the game will already be over.
  • Google’s outlook for 2017 remains pretty good but the shares still look fairly priced leaving me preferring Microsoft, Tencent and Baidu.

Microsoft – S for school.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Windows 10 S great for schools but not for the Surface Laptop.  

  • For the education of children, Windows 10 S makes perfect sense but for college and everything else, I can’t see why anyone would want it.
  • Microsoft held an education event this week where it launched a new version of Windows 10 called Windows 10 S and a stunningly beautiful laptop called Surface Laptop.

Windows 10 S

  • The main feature of Windows 10 S is that it is locked to running apps that are available in the Windows store.
  • This allows a greater degree of security as each app will have been checked by Microsoft but also will run in its own container.
  • This has the effect of not bogging down the operating system as often happens as devices age and ensures that performance will always be crisp and quick.
  • This is ideal for the classroom where all devices should offer exactly the same performance and teachers can’t waste time waiting for the older laptops to boot or load.
  • Windows 10 S also allows the school to take complete control of the device just as enterprises do with the laptops within their organisations.
  • I see this as highly appealing to schools whose aim is educate the students rather than to offer them a good and fun user experience on the device of their choice.
  • Microsoft has also added a handy feature enabling the creation of a USB drive that can install all of the required apps, settings and permissions on a Windows 10 S device in one go.
  • This makes the set up and management of devices within a school much easier and faster.
  • The app limitations mean that Windows 10 S can run effectively on devices that compete with Chromebooks which is clearly what Microsoft is intending with this version of Windows.
  • However, outside the controlled environment of a school, I can’t see anyone willingly running this version of Windows.
  • This is because what is available in the Windows Store is a sad reflection of the wealth of software that is available for the PC.
  • If take the example of a student at university then this reality is put into sharp focus.
  • Students tend not to have a lot of spare cash and therefore will rely heavily on free software which is they are using Windows 10 S needs to be on the store.
  • Taking the top free PC software as recommended by TechRadar, I found that 3 apps were available compared to 10 that were not but of which, 2 or 3 had something similar in the store.
  • The Windows Store does not offer Google Chrome, iTunes, Google Drive or any BitTorrent clients, all which I suspect are pretty important for cash strapped students.
  • Microsoft refers to its refusal to install the software that the user wants as a “friendly popup” that directs you to something similar in the store but I suspect that almost all users who have paid for their own devices will find this utterly infuriating.
  • Hence, I think that to make Windows 10 S gain any traction outside of schools, Microsoft needs to dramatically improve the Windows Store.
  • This will take some time and hence I see virtually no traction for Windows 10 S outside of the controlled education environment for which it has mainly been designed.
  • The good news is that users can unlock the device by upgrading to Windows 10 Pro for $49.99 (free for students) but how well Windows 10 Pro will run on a $170 PC remains to be seen.

Surface Laptop

  • Microsoft also launched a beautifully designed laptop that has looks and power but with the price tag to match starting at $999.
  • Every detail has been attended and it is refreshing to see a device maker show such care and passion for a product that it has created.
  • For high end users, who are not fans of the tablet form factor, this is a great option but in that regard, it has no business whatsoever being launched with Windows 10 S.
  • This product has clearly been designed to appeal to users and hence I suspect that almost every device will be shipped to users who have paid for it themselves.
  • Furthermore, the vast majority of schools, will not be buying this product for their students but rather something much cheaper.
  • Hence, I think that to create the best possible demand for this product Microsoft should offer the option for the device to ship with a regular version of Windows at no extra charge.
  • This is because I suspect that almost everyone who buys this service will not want to be bound by the limitations of Windows 10 S.
  • I think that after paying up to $2,200 for this device being forced to pay another $50 just to run the apps that the user wants will really stick in the craw.
  • Microsoft have launched the Surface Laptop as a hero device to encourage the adoption of Windows 10 S on much cheaper devices but it makes absolutely no sense for the device itself to run this version.

Take Home Message.

  • The end result is that I like Windows 10 S for school as it will take the fight to Chromebooks which dominate the education landscape in the US.
  • This is especially the case because Office is a far better option for content creation than Google Docs but where Google has an edge is in text books.
  • Google has spent a lot of time building up a huge library of e-text books for schools and this is something that Microsoft will have to quickly replicate in the store if it wants schools to switch.
  • Furthermore, if Microsoft can win students over to Office when they are young it sets Microsoft up nicely to continue its dominance with Office as these students enter the workforce.
  • Microsoft looks better positioned in education with this release which to me looks like a very long term, but worthy investment.
  • I continue to like Microsoft which is doing very well in the enterprise and fortunately the valuation does not demand excellence in consumer, where I continue to see indecision and slow decline.

 

Facebook Q1 17 – Sleeping policeman

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Facebook’s growth story hits a temporary bump for 2017.

  • Facebook reported good results but once again tried to temper enthusiasm with reality by saying that overall growth this year would slow materially.
  • Q1 17A revenues / EPS were $8.03bn / $1.04 nicely beating consensus at $7.8bn / $0.86.
  • Advertising revenue was $7.9bn of which mobile was $6.7bn making up 85% of total advertising revenues.
  • The user count has now hit 1.9bn MaU (1.3bn visiting every day) with the vast majority coming from mobile.
  • Video and Instagram remain the biggest drivers of growth but Facebook has reached a limit in terms of the amount of advertisements that it can stuff into its apps.
  • Further increases could improve revenues in the short term but would probably lead to a fall in engagement which would negatively impact revenues anyway.
  • Hence, Facebook is turning to other avenues to find growth.
  • With its existing mature apps, Facebook has 36% of the Digital Life Pie and this is now fully monetised.
  • This is why, I have long been of the opinion that to become a $40bn revenue company, Facebook needs to increase its coverage of Digital Life.
  • The good news is that the signs of this continue to strengthen and at its developer conference, Gaming and Media Consumption were in sharp focus.
  • The issue is that I don’t think that Facebook’s Media Consumption offering or its Gaming strategy are mature enough to really start generating revenues which is why revenues will really start to slow down this year.
  • The street is expecting a 40% YoY improvement in revenues this year which I think is unattainable.
  • However, once those new services hit maturity, I think that Facebook will once again, be in a position to beating expectations.
  • Consequently, as the disappointment sets in for lower growth in 2017, I expect the valuation of the stock to moderate.
  • This will be driven by straight-line-loving (of which I am equally guilty) analysts bringing down their long-term forecasts in response to short-term issues.
  • It is at the point that the greatest opportunity exists to invest in Facebook for the next leg of its development.
  • In the meantime, I continue to prefer Microsoft, Baidu and Tencent.

Apple FQ2 17– New normal

Reply to this post

RFM AvatarSmall

 

 

 

 

 

These days, Apple looks like an industrial. 

  • Apple reported reasonable results and in increasing both the dividend and the share buy-back program, ushered itself squarely into a new normal of pedestrian growth.
  • FQ2 17A revenues / EPS were $52.9bn / $2.10 broadly in line with consensus at $52.9bn / $2.02.
  • Gross margins were 38.9% at the high end of the guided range and slightly above consensus at 38.7% as the iPhone 7+ was a stronger contributor to the mix than anticipated, lifting profitability.
  • Unit shipments were:
    • 50.8m iPhones vs 51.4m expected with an ASP of $655 compared to $666 expected.
    • Note that a higher than expected inventory adjustment (1.2m units) more than accounts for the difference.
    • 8.9m iPads and 4.2m Macs also shipped with Macs faring a little better than expected.
  • Services continued to be very strong with $7bn in revenue growing by 18% YoY with Apple stating that it now has a total of 165m paid subscriptions.
  • This includes Apple Music, iCloud and the subscription services of others that it offers on the Apple App Store.
  • There is obviously a degree of double counting going on here where for example, Spotify subscribers who pay through the App Store are also included here.
  • In my opinion, this renders this number virtually meaningless as Apple is counting subscriptions of its competitors as its own although it will still be making some money from these subscribers.
  • This combined with both an increase in dividend and the share buyback program, indicate very clearly that there is no growth in this company unless it can conquer a new segment.
  • Having (rightly, in my opinion) given up on making a car (see here), there is no new segment in sight, and so I see Apple, by and large, growing in line with the world economy.
  • I suspect that it will swing above and below that average as new products drive replacement cycles but the long-term outlook is industrial in its nature.
  • The next swing is likely to come from the iPhone 8 for which speculation and anticipation is already at fever pitch.
  • This means that Apple has to come up with something pretty special to see another cycle that will push its revenue growth above its new long term average, albeit temporarily.
  • Fortunately, the valuation of the company is not too demanding with a PER of 13.0x but the buy case based on valuation has now evaporated.
  • I see very little upside other than income coming from the shareholder return programs.
  • I would prefer Microsoft, Baidu and Tencent for those looking for capital appreciation.

 

Wearables – Holding pattern

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Wearables are sitting in a holding pattern. 

  • Amazon, eBay and Google (Maps) have ceased supporting their apps on the Apple Watch, confirming my suspicions that while it may be novel to shop and navigate from the wrist, it is neither useful nor fun.
  • I see this as yet another sign that smartwatches and wearables remain in limbo as they are a solution looking for a problem explaining why most users tire of them so quickly.
  • That being said, I think that wearables and smart watches have found a niche in the recreational fitness market which looks to have bottomed out after a very difficult period in the middle of 2016.
  • The market returned to growth in Q4 16 with 25% increase in volumes YoY but it was the cheap and cheerful providers that made all of the running with Xiaomi, Samsung and the others accounting for the vast majority of the increase.
  • To make matters worse, these are already commodity products with most priced well below $100 where no one is making a sustainable return.
  • The market leader Fitbit saw a 23% decline while Apple Watch grew by 13%.
  • I think that the reason why there is so little differentiation remains that no one has really figured out how to make a wearable product a must have.
  • Even Apple, which has a legendary ability to come up with compelling use cases, has struggled and the main question asked by potential users is: “Why would I buy it?” rather than: “How much is it?”
  • Outside of fitness tracking, wearables are little more than remote controls for a smartphone providing no reason to shop or navigate from these devices.
  • This is why I suspect that Amazon, Ebay and Google Maps have dropped support although Google has said that it “intends” to support Apple Watch once again in future releases.
  • I would be not surprised to see other third parties drop support for the Apple Watch as there are costs involved with development which don’t seem to have shown any tangible benefit to the developer.
  • I think that one of two things need to happen to make this segment blossom:
    • First: Devices become capable of delivering medical grade health measurements.
    • For blood pressure and blood glucose alone this would open up a market of 1.4bn users.
    • There are some signs of this among the start-up community but there is still some way to go.
    • Second: A must have use for these devices has to be found.
    • I am not confident as this has been Apple’s great strength to date but even it has failed when it comes to the Apple Watch.
  • Hence, I think that Wearables will bumble along the bottom with very low profitability until one of these criteria is met.
  • I can’t say that I would be keen to invest in anyone with exposure to this difficult and non-profitable segment.

Apple vs. Qualcomm – Proxy war

Reply to this post

RFM AvatarSmall

 

 

 

 

 

Apple’s intransigence plays into Qualcomm’s hands. 

  • Qualcomm has been forced to adjust its guidance for the coming quarter after being informed by Apple that it would not be receiving any royalties for the foreseeable future.
  • According to Qualcomm (as Apple has made no statement), Apple has ceased payment as it finds the contract terms unacceptable even though it does acknowledge that some payment is warranted.
  • Qualcomm’s new FQ3 16 guidance is for revenues / EPS that will be $500m – $800m (midpoint $650m) and $0.15 – $0.30 lower than the guidance given at the recent FQ2 16 results.
  • Although the issues that Apple has with Qualcomm’s business model are very similar, if not the same as the issues that Nokia had back in 2006, the circumstances are completely different.
  • These are:
    • First Contract validity: The dispute that arose between Nokia and Qualcomm in 2006 occurred because Nokia’s contract had come to an end and the companies were unable to reach agreement on terms for the renewal.
    • Nokia stopped paying Qualcomm as it had no idea how much to pay and instead accrued an estimate of the cost in its balance sheet.
    • The contracts upon which Apple has ceased payments have not expired and I can’t see any real contractual grounds upon which to cease making payments.
    • As a result, I do not think that it will not be difficult to show to a court that Apple is acting in bad faith and to win an enforcement order.
    • Second: Third party suppliers. Apple does not pay Qualcomm directly as the payment is made by its manufacturing partners who make its products.
    • This means that Apple is getting involved in contracts that are in place between entities that have nothing to do with Apple other than it is the end buyer.
    • I do not think it will be difficult to argue that Apple has no real grounds to be involved in these contracts and is acting in bad faith.
  • Apple’s intentions are clear in that wants a lower rate from Qualcomm and unlike Nokia, is not prepared to wait until current contracts expire before launching its proxy war via its suppliers.
  • Apple’s royalties are calculated on the wholesale price of the device which in this case will be the price at which the supplier sells the finished device to Apple.
  • I calculate that the supplier is paying Qualcomm 2.8% of the price of the device from making the below assumptions:
    • Qualcomm’s FQ3 17 royalty revenues from Apple would have been from calendar Q1 17 as royalties tend to paid one quarter in arrears.
    • Apple shipped 52m units in calendar Q1 with an ASP of $650 giving iPhone revenues of $33.8bn upon which it made gross margins of 45%.
    • This means that suppliers sold the devices to Apple with an ASP of $448 for a total revenue of $23.3bn
  • There are a number of caveats to this assumption:
    • First price cap: There is a price cap above which no royalties are paid.
    • This cap was originally meant for products like laptops with modems, but premium smartphones are now so expensive that they often hit this cap.
    • I have estimated that this cap is somewhere around $500 but if it is as low as $400, then the rate I calculate paid by Apple goes up to 3.1%.
    • Second pay up front: There is a pay-up-front option (which Nokia took advantage of) which allows the vendor to pay a lower rate going forward.
    • It is not clear whether contracts with the iPhone suppliers have made use of this option or not.
  • The net result is that I calculate that Apple is paying somewhere around 3% to Qualcomm which I think is at least on par with many other vendors.
  • The problem with patents as there is no real way to determine what should be paid to for them.
  • I have long believed that patents are worth either:
    • First: what an entity is prepared to pay for them or
    • Second: the present value of the cash flows that the patent generates.
  • This is why historical precedent is so important when it comes to patent licencing and here Qualcomm has a huge advantage.
  • Qualcomm has hundreds of agreements and more than 20 years of history as evidence that its agreements have not damaged the mobile industry, in fact, quite the reverse.
  • Furthermore, I think Apple’s intransigence on this issue and ceasing payments that it has already agreed to in writing, plays enormously to Qualcomm’s advantage.
  • Courts look poorly upon a refusal negotiate and acting in bad faith and I think that Apple has done more harm than good to its case here.
  • Hence, I think Qualcomm’s chances of prevailing against Apple are better than they were against Nokia which is all the more reason why it should fight tooth and nail to preserve its business model.

MSFT / GOOG / AMZN – Law of large numbers.

Reply to this post

RFM AvatarSmall

 

 

 

 

 

The big guys get bigger. 

Microsoft

  • Microsoft reported slightly disappointing results where the ageing Surface Pro line slightly marred another superb performance in the cloud with Azure and Office 365.
  • FQ3 17 revenues / Adj-EPS were $23.56bn / $0.73 compared to consensus at $23.65bn / $0.70.
  • Office 365 passed 100m corporate users and grew 45% while Azure managed to grow revenues by 93%.
  • Windows revenues grew by 5% defying the steady but stagnant PC market but hardware was the real problem this quarter as the Surface Pro is badly in need of a refresh and phones have dwindled to almost nothing.
  • Microsoft is firing on all cylinders when it comes to the enterprise, but the consumer remains a big question and a fiscal drag.
  • Fortunately, there remains upside in Microsoft even if the consumer continues to drift, leaving still able to favour the shares.

Alphabet

  • Alphabet reported excellent results as revenues from mobile continued to outpace expectations and spending on moonshot projects was reigned in.
  • Q1 17 revenues / EPS was $20.1bn / $7.73 compared to forecasts at $19.8bn / $7.41.
  • Once again advertising from mobile devices has led the way as users spend more time on their devices and do more with them.
  • YouTube also fared well as the advertiser boycott did not have the impact that some feared it would.
  • On the whole, YouTube is growing extremely well but there are the first rumblings of dissent from some of the biggest content creators on the platform who have seem some demonetisation to keep advertisers happy.
  • Google remains focused on keeping its lead in AI, developing a cloud offering to compete with Microsoft and Amazon and on rolling out hardware.
  • While the shipments of its hardware products have not lived up to my expectations, the reception of them has been good and there is very little doubt that Google Home is a vastly superior product to Amazon’s Echo series of products.
  • Hence, I think the outlook remains good but the stock price has keeping step with these developments and remains fairly fully priced in my opinion.

Amazon

  • Amazon reported very strong revenues and even managed to make a profit, while clearly signalling that it intends not to lose the indian market as it lost China.
  • Q1 17 revenues / EBIT were $35.7bn / $1.0bn ahead of forecasts at $35.3bn / $855m.
  • AWS grew much more slowly than Azure at 43% YoY but I suspect that this is largely because AWS is much larger rather than Azure taking share aware from Amazon.
  • Profitability also improved at AWS with margins of 24.3% which combined with steady, but low profitability in the US offset increasing losses overseas particularly due to the India roll-out.
  • Amazon is clearly going all out on India which is a major threat to Flipkart which cannot afford to burn hundreds of millions of dollars every quarter.
  • This is why I see the need for very rapid consolidation of the rest of the Indian e-commerce industry into Flipkart as without scale, the others stand little chance of survival.
  • As a result, Q2 17 profitability will be weaker than expected with Q2 17E revenues / EBIT forecasted at $35.35bn – $35.75bn ($35.5bn) / $720m – $1,075m ($898m) compared to consensus at $1,529m.
  • While Amazon continues to refuse in making in sustainable profit, I find the valuation much too much to stomach and continue not to like a position in the company.