MSFT / GOOG / AMZN – Law of large numbers.

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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.

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