Apple & Amazon – Mixed Bag

Apple FQ4 24 – Intelligence upgrades.

• Apple reported good results as the promise of Apple Intelligence has generated a mini-upgrade cycle, but it was not nearly enough to return the company to the kind of growth that its valuation demands.
• FQ4 revenues / Adj-EPS were $94.9bn (+6% YoY) / $1.64 slightly ahead of consensus at $94.4bn / $1.60.
• iPhone revenues were $46.2bn (up 5.4% YoY) driven by upgrades in the West and stabilisation in China after several quarters of weak performance.
• Apple is claiming that the promise of Apple Intelligence is resonating with owners of iPhones that can’t support the new feature which it says is driving upgrades leading to the iPhone 16 shipping more in its first 8 days of availability than the iPhone 15 did last year.
• This will have only had a very small impact on FQ4 24 but will have been a key ingredient in the more positive commentary surrounding its expectations for FQ1 25.
• Stabilisation in China was also a factor where it appears that nationalistic market share loss to Chinese brands has slowed down.
• However, this was not enough as the company forecast of “low to mid-single digit” revenue growth was less than the consensus estimate of 7% YoY.
• This is a very marginal miss which is reflected in the fact the shares sold off just 1.4% in after-hours trading which in the grand scheme of things is little more than a rounding error.
• However, these results are symptomatic of a hugely successful company with a growth problem.
• This is not necessarily an issue on its own but when one is trying to justify a 2025 PER of more than 30x, hard questions start to get asked.
• This is why I continue to be indifferent to the shares.

Amazon Q3 24 – Big spender

• Amazon reported excellent results as streamlining efforts paid off, but this will be immediately invested in data centres with $75bn this year and even more in 2025 which will have Jensen Huang rubbing his hands with glee.
• Q3 24 revenues / operating profit were $158.9bn (up 15% YoY) / $17.4bn nicely ahead of estimates of $157.3bn / $14.7bn.
• The main driver of the better-than-expected results were AWS where margins improved to 38% and International ecommerce which reported a profit once again in what is hoped to be a trend.
• This puts trailing 12-months operating cash flow at $112.7bn which is up 57% YoY which is how Amazon can afford to spend even more money on its data centres.
• Andy Jassy describes generative AI as “a really unusually large, maybe once-in-a-lifetime type of opportunity” explaining how it can remain comfortable spending over 2/3rds of operating cash flow on capex.
• This number is expected to rise again next year meaning that the company will need to keep streamlining its operations wherever it can.
• AWS revenue grew by 19% YoY meaning that it is losing ground to both Azure and Google Cloud, but this is not unexpected given how much bigger it is compared to its competitors.
• However, it has not seen as much growth acceleration as the other two, implying that Microsoft with its OpenAI technology and Google with its homegrown Gemini foundation model are conferring an advantage to them.
• As long as the 38% operating margin remains intact, this is clearly money well spent which is why the market remains unconcerned about this massive spend and sent the shares up 6% in after-hours trading.
• The real winner from these results and those of Microsoft and Google is Nvidia where the company is clearly selling as many chips as it can make and earning 75%+ gross margins at the same time.
• Nvidia is growing faster than Amazon and trades at a lower PER multiple which is why I would rather own Nvidia over Amazon if I had to choose between them.