Amazon & Uber – Cylinders and pockets.

Amazon Q4 19 – Almost all cylinders

• Amazon reported excellent results that completely overshadowed the hundreds of millions that Amazon is burning to win India as its investments in growing revenue are paying off but there still remains a long way to go when it comes to profitability.
• Q4 19 revenue / net income were $87.4bn / $3.3bn ahead of forecasts at $86.1bn / $2.0bn.
• Despite the growth, North America profitability fell to 3.5% from 5% in Q4 18 as the company has been investing heavily to improve distribution in order to gain share.
• This had driven fears of a collapse in profitability which did not occur to anything like the degree that was expected.
• Overall Q4 19 EBIT margins were lower at 3.7 % than the 4.2% reported in Q4 18, but the expectation is now that its investments will pay off and margins will start rising.
• Amazon Prime now has 150m paying subscribers and Amazon Music now has 55m users meaning that Amazon is finally becoming a viable ecosystem in its own right.
• Advertising is also becoming a major business line with $14.1bn generated in 2019 meaning that it is beginning to snap at the heels of the big names.
• The results look excellent at first glance but to me, it looks like more of same, where Amazon’s habit of not wanting to make profits continues to be the order of the day.
• I think that as the current round of investments really begins to pay off, more will be found and margins will stay low.
• Against this backdrop, I still am unable to stomach the valuation of the shares which continue to trade on momentum rather than fundamentals.

Uber and DoorDash – Shallow pockets.

• A merger between Uber and DoorDash seems to be on again as their beleaguered investor, SoftBank, badly needs them to combine as it is suffering from losses incurred as these two compete against each other.
• UberEats is currently a financial black hole that lost $317m in Q3 19 largely in its efforts to gain share against DoorDash which is the dominant player in most US markets.
• Just like ride-hailing, food delivery is a network-based business where dominance needs to be achieved in order to make a decent return.
• Until that point, it is a cut-throat battle for market share where the player with the deepest pockets is the one that wins.
• The WeWork disaster has made SoftBank’s backers very uncomfortable and the depth of its pockets has been reduced considerably.
• This is why a merger of these two makes complete sense for SoftBank as two money-losing investments could quickly become a single profitable one.
• There will still be plenty of competition in this space should this happen, but I can see this withering away as rivals continue to lose money.
• This is an obvious move for SoftBank and one I am sure Uber would be very willing to make but whether the founders of DoorDash can be convinced remain to be seen.
• This would be a good solution for Uber and would allow the fact that its US business is making money to be finally noticed by the market.
• That being said, a valuation of $62bn is still way too high in my opinion especially as its long-term future in robotaxis is currently on extremely shaky ground (see here).
• I am in no way tempted.