Amazon and Apple – Holding steady

Apple FQ3 23 – Eating Android.

• Apple reported a difficult set of results but weakness in the smartphone market was offset by a strong performance from services and the incremental gains that the iOS ecosystem is making in emerging markets.
• FQ3 23 revenues / EPS were $81.8bn / $1.26 broadly in line with estimates of $81.8bn / $1.19.
• iPad revenues were particularly weak falling by 20% YoY but given the environment, iPhone revenues declining by just 2.4% was a pretty stellar achievement.
• This comes down to a strong performance in China where, even in the absence of an economic recovery, revenues grew by 7.9% YoY and growth at its Services division.
• Services crossed 1bn paying subscribers for the first time and grew revenues by 8% YoY with operating margins of 71%.
• This is what allowed EPS to come in better than expected.
• It is worth remembering that a big portion of the Services business is extended warranties and insurance (Apple Care) which I have long suspected is the source of the very high profitability of this division.
• The net result is that Apple is weathering the difficult environment extremely well and is doing so by continuing to eat away at Android in emerging markets.
• Both China and India are top of the hit list but there is only so far that Apple can penetrate these markets given the relatively high price of its products.
• Instead, what is more likely is that penetration grows via the second-hand market where Apple can monetise these users via the Services division.
• Apple remains in a strong position but its 2023 PER ratio of 32x looks expensive for a company that is struggling to post any positive revenue momentum at all.

Amazon Q2 23 – Law of large numbers.

• Amazon reported better than expected results as higher prices helped revenues to turn positive while AWS growth slowed less than expected.
• Very much like Google, Meta and Microsoft, the cost cuts that the company put through in H1 2023, helped profitability to beat estimates this quarter and meet estimates for Q3 2023.
• Q3 2023 revenues / EPS were $134.4bn / $0.65 ahead of estimates of $131.5bn / $0.35 largely driven by cost cuts.
• E-commerce revenues both at home and abroad grew by around 10% which, even when adjusting for the higher prices being paid by consumers due to inflation, represents a good performance in this environment.
• AWS also beat expectations with YoY growth of 12% down again from 16% YoY in Q1 23 but crucially, this was better than expected leading to Amazon’s claim of “stabilisation” at AWS.
• However, I see little evidence for this view as both Microsoft and Google Cloud are still growing in the mid-20s while AWS continues to decelerate.
• I suspect that part of the problem is that Amazon is not seen as being part of the generative AI craze and, as such, is not the first call companies are making when wanting to create these sorts of services for their businesses.
• This also means that when the craze comes to an end, Amazon will begin to outperform its smaller rivals but for the moment, I think that this trend will continue for a while yet.
• This is why the real story of these numbers is Amazon’s performance in e-commerce in the environment of tight budgets and consumers trading down.
• Here, Amazon’s platform as an easy place to look for lower-priced alternatives seems to be working in its favour and it is here where I expect any further good news to be found for the balance of 2023.
• That being said, I continue to find little good news in Amazon’s valuation where the shares are trading at a 2023 PER of 85x and 53x 2024.
• There is far better value to be had elsewhere in the sector.