Amazon & Alphabet Earnings Review

Amazon Beats Revenue Estimates

In the midst of the negative news during the market sell off on Friday, AMZN stock was rallying because it beat estimates. The stock was up 2.87% on Friday and fell with the market on Monday. The firm reported $3.75 in Q4 2017 EPS which wasn’t comparable to estimates because of the tax benefits the firm saw which weren’t in the estimates. The company reported $1.9 billion in net income; the tax benefit was $789 million. Many companies are seeing one time changes because of the tax law which is making Q4 confusing if you don’t look at results closely. As you can see from the chart below, Amazon has now been profitable 11 quarters in a row. The investors who stuck with the company when it was reporting losses have been rewarded mightily. They believed the company was making the necessary future investments; those investments have paid off. Patient investors have allowed CEO Jeff Bezos to look to the next 2 years instead of the next quarter. Although it looks obvious in hindsight, 5 years ago, it wasn’t clear that Amazon Web Services and Amazon’s Alexa assistant were going to be this dominant.

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Revenues were $60.5 billion which beat estimates for $59.83 billion. That was a 38% increase from last year. That breaks down to $37 billion in North American sales which was 42% growth and $18 billion in international sales which was 29% growth. The Amazon Web Services revenues were $5.11 billion which beat estimates for $4.97 billion. AWS had 45% sales growth and accounts for 64% of operating income. You can see this break down in the chart below. As you can see, the international segment has negative margins, North America has razor thin margins, and AWS has very high operating margins.

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The revenue guidance for Q1 2018 was $47.75 billion to $50.75 billion. This beat estimates for $48.6 billion. The operating income estimates were way below the consensus the street had which is normal for Amazon. Operating earnings guidance was for between $300 million to $1 billion. That was way below the estimates for $1.5 billion. The company makes it clear that it isn’t concerned with near term results, but it sometimes beats its own estimates by a wide margin. It’s an excessive use of under promising and over delivering. The very wide company guidance is a farce because it tells you nothing about the current quarter.

The low operating earnings estimates show the company is investing heavily in the future. The total costs were up 38% in Q4 to $58 billion. The charts below show how well these investments have worked out in the past few years. The cloud business has a 34% market share; online commerce has a 44% market share; 64% of U.S. households have Prime; 71% of U.S. voice home devices are Amazon products. Alexa and Google Assistant dominate this market. Apple is trying to get a slice of the pie with its HomePod.

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One of Amazon’s newest ventures is Whole Foods which it is trying to transition to be more like a traditional supermarket utilizing Amazon’s expertise in logistics to improve margins. Revenues from physical stores, which is mostly from Whole Foods, was $4.5 billion. The long term plan is to catapult in front of the competition by utilizing its Amazon Go technology which enables no checkout. The company just opened its first concept store, but it’s far away from having this technology in every Whole Foods. The company can’t even get the correct inventory in the Whole Food stores because it is struggling with implementing the Order to Shelf System which streamlines and tracks product purchases, displays, stores, and sales. Employees are having a tough time dealing with the new rules.

GOOGL Alphabet Misses Earnings Estimates

Alphabet’s earnings miss was one of the catalysts for the Friday stock market correction. The stock is now down 10.21% from its all-time closing high January 26th. The charts below give an overview of Alphabet’s quarter. EPS was $9.70 which missed estimates for $9.98. Revenues were $32.32 billion which beat estimates for $31.86 billion.  The aggregate paid clicks were up 43% which beat estimates for 42.1%. Cost per click was down 14% which beat estimates for a 14.6% decline. This long term decline has been caused by the shift to YouTube and mobile ads.

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YouTube had a rough quarter as the controversies about a few of its big creators caused advertisers to pull back from the platform. YouTube is trying to regulate small channels by saying they need 4,000 hours of watch time and 1,000 subscribers to monetize their channel. The goal is to avoid a random channel from gaming the system by making money on explicit content. However, the company has missed the mark badly because it hasn’t acted to take down the problematic videos the big creators have made.

The attention span for young viewers is very short, meaning the stars of today won’t be as famous tomorrow. If YouTube loses new creators by limiting the money small channels can make, it can lose its flow of new talent. The company has been dominant for years despite having problems controlling content and with copyright complaints. However, it succeeded because of its massive size which is its moat. By limiting small channels, another company can swoop in and take share by offering compensation. That would be a better deal even if the website gets less traffic. My entire thesis on this lies in the direction YouTube is headed in. The company has upped its minimum monetization before, meaning it will likely do it again.

Furthermore, other medium sized channels are getting demonetized because the algorithm isn’t working. For example, a channel could mention the “Carolina Hurricanes” hockey team in the title and get flagged even though it’s a hockey video. The video gets re-monetized by YouTube after it manually reviews the video, but the channel misses out on the ad money during the first day it was out; that’s when it gets the most views.