- Consumer weakness and higher inflation pressure Amazon
- Apple impresses but warns of up to $8B in supply-chain headwinds
- Big tech earnings behind us… what did we learn?
Meta (aka Facebook) helped advance tech stocks today… however the reprieve may only be temporary.
More on why in a moment…
Investors snapped up the social advertising leader – which showed a small increase in DAUs (Daily Active Users) and ARPU (Average Revenue Per User).
These are two critical success metrics… as Meta continue to navigate a challenging period.
For those less familiar, DAUs is the power of their network.
If this holds (or advances) – it tells investors the network effect is intact. DAUs were 1.96 billion vs 1.95 billion expected.
From there it’s a question of monetization; ie ARPU.
This came in higher than expected – $9.54 vs. $9.50
All is not lost.
With the stock trading as low as 13x forward earnings early this week (adjusted for cash held per share) – investors realized was value (vs growth)
Or are they getting a growth stock at a value multiple (GARP)?
And whilst revenue growth has never been slower (as they navigate iOS privacy changes, reduced ad spend, revenue loss from Russia/Ukraine; and the competitive impact from TikTok’s short-form content) — the quarter wasn’t a disaster.
But with Meta, Microsoft and Google behind us – all eyes were on Amazon and Apple.
My sentiment prior to earnings was:
- Amazon faced significant downside risks and looked expensive at 53x forward earnings. How much weakness would we see with consumers on the retail side? And what impact to margins was inflation having? and
- Apple was likely to beat and was likely to continue buying back shares (given their cash generation). But what were they going to say about demand vs supply (i.e. Chinese supply chain risks)?
Let’s start with Amazon – as the stock is expected to trade around 8-10% lower tomorrow.
Amazon Disappoints on Guidance
At ~53x forward earnings – the bar was high in this unforgiving climate.
I expected a strong Cloud (AWS) number given Microsoft’s 46% growth with Azure; and Google Cloud reporting 44%.
However, I felt less certain about the pressure on the consumer (and any impacts from inflation).
Here are the numbers:
- Earnings: $7.38 per share, adjusted, vs. $8.36 expected (3.2% operating margin)
- Revenue: $116.44 billion vs. $116.3 billion expected (7% YoY)
- Amazon Web Services: $ 18.44 billion vs. $18.27 billion expected
- Advertising: $7.88 billion vs. $8.17 billion expected
- A $7.6 billion loss on its Rivian investment – where the EV maker lost half its value – a total net loss of $3.8 billion.
A bright spot was AWS growing 37% YoY – coming off a huge base.
A couple of very quick observations:
- Operating margins at 3.2% leaving Amazon no room for error.
- This shows the impact of higher inflation in operations (which they said is not abating anytime soon)
- AWS was impressive with 37% YoY growth – where margins are up over 50% (i.e., enterprise is doing very well vs consumer)
- Forward revenue guidance of just 5% was below expectations
Forward guidance is cause for concern.
For example, there are two near-term headwinds facing Amazon (and why the forward PE is in question)
- Consumer confidence – retail business is down 3% YoY; expected to be down 6% in the subsequent quarter; and
- Margin squeeze due to inflation – Amazon’s business is extremely sensitive to higher costs w/1.3M workers and their logistics business.
Put these two together and you can see why this stock remains “parked” for at least 2-3 quarters hence (maybe longer).
There’s really no reprieve on these two forces in the near-term.
For example, we’re likely to see continued pressure on consumer spending – versus what we saw say 12 months ago. That’s going to get tougher as rates climb and inflation stays high.
Second, we’re seeing what impact inflation is having on margins.
Costs are rising and this is proving difficult for Amazon to suppress.
So what’s a fair price?
From mine, 53x forward isn’t sustainable given the above.
I think we could see this drift to as low as 40x.
And I nominate this is it’s likely to keep growing in the realm of 30% to 35%… which implies a price to growth ratio of around 1.14x
For example, if we assume earnings of around $55 per share (where the average estimate is $47) – this puts us around $2,200 per share (where $55 x 40 = $2,200).
Remember:
Whilst the stock trades at a hefty premium – they have built a world-leading eCommerce and Cloud platform – a service which is unparalleled. This is likely to serve them well for many years to come.
Let’s look at the weekly chart…
April 28 2022
I shared this chart earlier this week.
Tomorrow Amazon is likely to open between $2,500 and $2,600.
It could trade lower or higher…
However, should the stock trade lower than this, I think we will see investors start to come in.
For what it’s worth – I don’t pretend to pick bottoms.
But if your time-horizon is years (not months or quarters) – given the strength of Amazon’s multiples businesses – we are likely to look back at say sub $2,500 was a very good price.
Apple’s Impressive Quarter
Apple delivered another incredible quarter.
That said, the street reaction is mixed given the warnings they delivered on supply-chain concerns.
CEO Tim Cook said to the market “even Apple is not immune”
Apple’s CFO advised the subsequent quarter could be hit by “$4B to $8B” in sales revenue due to supply chain constraints. He said there is not a demand problem (people want to upgrade their iPhones)… there’s a supply problem.
Here’s the commentary:
Apple CFO Luca Maestri warned of several challenges in the current quarter, including supply constraints related to Covid-19 that could hurt sales by between $4 billion and $8 billion.
The tech giant also warned that demand in China was being sapped by Covid-related lockdowns. Apple CEO Tim Cook added the company was “not immune” to supply chain challenges.
This is arguably a bigger headwind than what the market was expecting… but it’s also something which isn’t permanent.
Apple will work through this and supply chains will ease.
What’s more, I don’t think an iPhone sale (or upgrade) is a ‘lost sale’… it’s more like a sale delayed.
Apple’s 1B+ users are not going to swap out their phones because of a supply-chain constraint.
Regardless, this is perhaps why the street is taking some gloss off Apple’s (impressive) numbers:
- EPS: $1.52 vs. $1.43 estimated
- Revenue: $97.28B vs. $93.89B est., up 8.59% YoY
- iPhone revenue: $50.57B vs. $47.88B est., up 5.5% YoY
- Services revenue: $19.82B vs. $19.72B est., up 17.28% YoY
- Other Products revenue: $8.81B vs. $9.05B est., up 12.37% YoY
- Mac revenue: $10.44B vs. $9.25B est., up 14.73% YoY
- iPad revenue: $7.65B vs. $7.14B est., down 1.92% YoY
- Gross margin: 43.7% vs. 43.1% est.
Throw in a whopping $90B share buyback and shareholders are being rewarded.
Every metric here is “up” excluding iPad revenue.
But here’s the thing:
Whilst hardware is important (iPhones, Macs, iPads, iWatches etc) — the Apple story is very much shifting to (higher margin) services.
Over 1B users are virtually “locked into” the Apple ecosystem – which tells me their services business (e.g., news, music, TV, storage etc) is only set to grow.
Services grew almost 18% YoY– with operating at margins north of 60%
Furthermore, consider longer-term (speculative) bets Apple is making on driverless cars, augmented reality, health services and wearables.
What’s to say any of these won’t be $50B+ stand-a-lone business in 5+ years?
Innovation doesn’t stop at Apple (as is the case at Google, Amazon, Facebook and Microsoft)…. and you want to be part of that story.
To the weekly chart:
April 28 2022
As we can see above, Apple has held up amidst the growing uncertainty vs its peers.
And it’s not uncommon for the stock to pull back anywhere between 20% and 40% as it climbs the long-road higher.
I added to my existing long position on the previous pullback (where the stock dropped ~13%) at levels of $138.
The stock is now working through another pull back which will represent opportunity.
From mine, if the stock falls down to around $140 to $150 on broader market weakness – I would be a buyer.
The stock is not without risk (given the near-term headwinds) – but it’s as good as quality as you can buy over the long-term.
Here’s a question for you:
Tell me one other company that can replicate what Apple has built (in terms of its sticky user base, hardware / operating system and broader ecosystem).
Just one?
It’s “moat” is as strong as you will find.
Putting it All Together
Big tech earnings are behind us for Q1 2022.
We have ‘cleared the slate’ — however we didn’t get through unscathed.
Personally my portfolio took a hit with Google my largest position.
Apple and Amazon are also up there in my Top 4.
That’s okay… as I think I will be great shape towards the second half of the year.
Only two of the big five (which comprise ~25% of total S&P 500 market cap) managed to move to the upside – Meta and Microsoft.
And it makes sense:
- Meta – the bad news was already priced in – trading at a forward PE of just 13x at its low. And with the stock growing DAUs and ARPU – it was seen as ‘less bad news’; and
- Microsoft – the resilience of their enterprise business is unparalleled. 46% growth YoY for Cloud says it all.
In terms of Google and Apple – I thought they were very good numbers.
- Google – delivered 23% revenue growth YoY; announcing a $70B buyback. Everything Ruth Porat (CFO) said on the call was positive. However the market was concerned with “only” 14% growth in YouTube and the impact from competitive short-form content; and
- Apple – delivered another impressive quarter – only marred by the headwinds they face with ongoing Chinese supply chain – flagging between $4B and $8B sales impact next quarter. This is temporary – not permanent. It’s a sale delayed – not lost.
But Amazon (for me) was cause for concern.
For example, what we’re seeing with the consumer; and also the impact from sustained levels of higher inflation on margins.
Operating margins at only 3.2% does not leave any room for error. And with inflationary pressures unlikely to ease – it puts into question a very high 53x forward multiple. That’s going to come down.
The market is likely to exhibit some further weakness after Amazon’s numbers.
Question is – will the zone of 4100 hold for the S&P 500?
It’s likely to be re-tested.