AMZN / SNAP Q4 21 – No Meta here

Amazon Q4 21 – AWS to the rescue, again.  

  • Amazon reported good results in the face of rising costs, but it was the combination of the price increase for Prime and relief that Amazon is not Meta that sent the shares up an incredulous 15% in after-hours trading.
  • Q4 21 revenues / EPS were $137.4bn / $27.75 compared to expectations of $137.8bn / $3.77.
  • Net profit included a one-time gain of $11.8bn from the IPO of Rivian which if removed brings EPS from continuing operations down to $4.81, still nicely ahead of expectations.
  • A stellar performance from AWS which grew by 39% YoY with EBIT margins of 29% (up from 27% in Q4 20) made up for both North American and International e-commerce operations returning to their traditional loss-making positions.
  • This has largely been caused by rampant wage inflation as well as absenteeism caused by the pandemic which is why Amazon is putting up the price of Amazon Prime membership.
  • This is increasing to $139 from $119 which, for people who buy everything on Amazon including toilet roll, still represents great value.
  • Amazon Prime now has 172m members all of whom have a big incentive to buy everything on Amazon as delivery is all you can eat which is going to continue to push costs up.
  • Hence, I don’t expect that any of this is going to fall to the bottom line meaning that Amazon could easily slip back into its bad old habits of constantly losing money on e-commerce.
  • The contrast with Alibaba, which is widely hated, is stark.
  • Alibaba is hugely profitable, trades at a fraction of the valuation of Amazon and should resume good growth when the CCP realises that zero Covid won’t work and allows the economy to reopen properly.
  • Amazon’s valuation is much more reasonable these days but for anyone that can do arithmetic, it is obvious which e-commerce company one should own.

SNAP Q4 21 – Executed out of trouble

  • Snap chose a great time to report its maiden profit as its results beat expectations proving that Meta’s problems are fairly unique to the company.
  • As a result, a 23.6% dive in its share price yesterday turned into 19.5% rally making for a total intraday move of a staggering 56.5%.
  • Pinterest managed something similar but to a lesser degree indicating just how dangerous investing in highly valued growth stocks with so much value predicated on future profits can be.
  • Q4 21 revenues / EPS were $1.3bn (up 42% YoY) / $0.01 nicely ahead of estimates of $1.2bn / LOSS$0.09.
  • Unlike Meta, Snap was able to increase its user count faster than the market expected, albeit pretty slowly.
  • Critically, Snap appears to executed well when it comes to the creation of tools that allow advertisers to regain the insight into the advertisements that they lost with Apple’s “ask app not to track” feature.
  • This was a key concern going into Q4 21, which the company seems to have fixed, resulting in revenues coming in ahead of expectations.
  • However, a 56% intraday move in the share price clearly demonstrated just how precarious investing in these names has become.
  • Twitter, Snap, Pinterest, Peloton and so on are well off their highs but the multiples being attributed to their earnings are still at the high end of the range.
  • This means that there is plenty of space for further heavy corrections should there be any slip-ups or mistakes.
  • I continue to prefer the value end of the technology market especially as rising interest rates (real or imagined) are going to be the talk of H1 which will hit the growth segment much harder than the value segment.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.