Apple FQ4 21 and Amazon Q3 21 – FAANG Slip

Apple FQ4 2021 – Not so chipper.

• Apple reported disappointing results as a result of the ongoing supply chain difficulties and also warned that the problems were getting worse going into Q4 2021.
• Revenues / EPS were $83.4bn / $1.24 behind forecasts of $84.7bn / $1.24 and it warned that the supply chain issues would cause $6bn of demand to go unfulfilled in the coming quarter.
• The chief culprit was the iPhone which was expected to generate $41.6bn in revenues but only managed $38.9bn.
• iPad and Mac managed to fare better, but the wearables division also suffered.
• Apple said that supply chain issues were affecting all of its products and given that last year was so strong, this makes comparisons difficult.
• In some ways, Apple has become a victim of its own success in that it sells such high volumes that any kinks or issues that affect the supply of its components have a disproportionately large effect.
• Hence the scene is set for a tricky FQ1 where Apple will be scrambling to gather as much supply as it can in order to meet the seasonal uptick that most consumer electronics companies enjoy at this time of year.
• The net result will be a lower seasonal bump than usual but users who buy Apple products tend not to buy substitutes meaning that sales lost in this quarter will probably materialise later in the year when supply is easier.
• Consequently, I see this as a delay rather than cancellation.
• While the fundamentals of the company remain intact, I continue to think that the market is attributing too much value to them compared to what is on offer elsewhere.
• Apple trades at FY2022 25.2x PER with an expected growth rate of 22% which is more expensive with lower growth than many other large technology companies.
• Hence, I continue to remain on the sidelines.

Amazon Q3 2021 – The silver lining.  

• Amazon reported disappointing results as the pandemic spending boom has finally started to wane and in the coming quarter, Amazon faces the prospect of having to pay higher wages in a very tight labour market.
• Q3 2021 revenues / EPS were $110.8bn / $6.12 compared to forecasts of $111.8bn / $12.37 indicating that the slowdown in consumer spending in the quarter was very marginal.
• I suspect that this miss probably has more to do with out-of-stock issues causing users not to buy rather than a slackening of demand.
• However, Q4 is another story where revenues are expected to be $130bn – $140bn compared to consensus at $141.6bn and the company may end up making no money at all in the quarter.
• This is painful as Amazon is being squeezed from both ends as consumers are buying less and Amazon is having to work harder to fulfill that lower than expected demand.
• Furthermore, In the medium term as inflation bites, this may begin to put a crimp in demand as everything appears to cost more for consumers.
• A couple of years ago, this would have hammered the shares by 10% or more but the reaction this time was much more muted at 3.8%.
• This is because the valuation of Amazon’s shares has dropped to much more reasonable levels giving fundamental support when things go wrong as they just have done.
• The net result is that the outlook for the next few quarters is going to be difficult with both lower demand and higher wage costs putting pressure on profitability.
• Although Amazon’s valuation is much more reasonable than it was it is still way higher than Alibaba where I think the regulatory issues are in the past and the outlook for growth remains pretty good.
• I am still long Alibaba and it remains the only FAANG like name that I want to own.