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To start the month, we saw two incredible events: Facebook and Amazon’s earnings.
On February 3rd, Facebook lost $232B in market cap in a single day – marking the largest LOSS ever. Then one day later, Amazon gained $190B market cap in a single day – marking the largest GAIN ever.
There used to be a narrative in the market that “large tech can’t go up/down 20%+ in one day because they’re just too big”…
There has also been an attitude that as goes tech, so goes “the market.” This has also been thwarted as of late, especially over the course of last year where the S&P far outpaced the NASDAQ.
There’s a lot going on from a macro standpoint that has rippled through to affect earnings for mega-cap companies.
Let’s break down the nuances of these two specific company earnings and why there was such a divergence between the two.
This week, in <5 minutes, we’ll cover Amazon and Facebook Earnings:
Amazon Earnings 👉 Dismantling critics…and bridges
Facebook Earnings 👉 The power of gateways
BUT WHY?!?! 👉 Macro and Fundamental Differences
How GRIT’s Playing it 👉 Long Amazon, Sell Facebook (Meta? Whatever…)
Let’s get started!
1. Amazon Earnings 👉 Dismantling critics…and bridges
Amazon’s quarter was nothing short of spectacular. In the midst of market panic over interest rates on tech stocks and lots of variability between companies, Amazon seemed to cradle the market back to peace in its massive hands. A couple of highlights…
1. 2-yr Revenue CAGR of 25% was in line with Q3/21 and pre-covid levels.
2. AWS revenue growth accelerated to 40% (FOURTH straight Q of acceleration), suggesting that AWS continues to dominate cloud.
3. Q4 operating income results and the Q1 guide came in “better than feared” suggesting ongoing margin recovery in 2022
4. Amazon believes supply chain troubles are largely behind them;
5. The massive CAPEX investment cycle around AMZN fulfillment (One Day, Same Day, Super Same Day) is now starting to taper…which may unlock accelerating Retail Revenue growth, as it did in 2019
6. Advertising now broken out as a separate category at $31B annually, up 32% y/y vs. 3Q's +53%.
7. $20 Prime Price increase announced, and no one flinched
The topline growth figure for the Q4 revenue on a YoY basis (only 9.4%) can be deceiving because of the pull-forward from the year before, so a lot of analysts focused on a 2yr revenue CAGR during a period of more normalization.
As people go back into stores and spend less online after a massive influx of online-only it’s important to apply context to these YoY growth numbers. The most important growth takeaway from Amazon is that they have generated 20%+ organic revenue growth for 76 of the last 84 quarters…talk about compounding.
The three particular things that stood out to me this quarter were AWS growth, the advertising segment, and the pricing power of Prime.
AWS growth was incredible as the cloud continues to be an area where a rising tide lifts all boats. Except cloud is not a tide, it’s a tsunami, and Amazon is Laird Hamilton. The most impressive thing about AWS is its growth at scale. What other business can grow 40% Yoy at a $70B run-rate? None.
Another factor in AWS that was impressive was the fending off of competitors. There’s #1 most important competition for market share right now in the entire stock market is going on in cloud computing. The biggest guys with the biggest balance sheets going after one of the biggest markets.
Azure (Microsoft) and GCP (Google) have been stealing market share from AWS. As of Q4, AWS is still the leader at 33%, with Azure at 21% and GCP at 10%. Look at AMZN’s ability to maintain market share…
The second impressive part of Amazon’s print was that they finally disclosed exactly how much their advertising revenue segment makes. Since more and more people started to go directly onto amazon to search for goods instead of typing them in on google, Amazon started to have much more direct capture of advertising spend native to its site.
Advertising revenue for Amazon is huge and growing fast…$31B annually, up 32% y/y vs. 3Q's +53%. To put this in context, in 2021, YouTube’s global advertising revenues were ~$28B. Amazon Ad business > YouTube Ad business. Whaaaaat?!
The final impressive component was the announcement of the prime membership price increase.
We’ve seen a different flavour of this before every time Netflix discusses increasing their subscription service price. But the problem there is there are now 12+ other competitors to choose from, leading to a re-bundling of the great un-bundling. But that’s a topic for another time…
Amazon increased the price by $20/year and no one blinked. Could you imagine canceling your prime subscription? No fucking chance. My toothpaste tube runs out? I don’t put it on a grocery shopping list. I fire up the Amazon app and it’s on my doorstep the next day. The amount of infrastructure buildout Amazon has undergone to be able to do this is one of the most defensible moats in modern business.
Not to mention the free music AND prime video attached to it. Any time I pay for something and mentally go, “I would pay 4x the cost of this to keep it.” THAT, my friends, is pricing power.
By the numbers… customers will readily accept the $1.67 incremental monthly cost “hit,” given Prime’s increased value proposition. This $20 increase should translate into $2B of incremental annualized Revenue/Profit.
But of course, we need to look at the other side of the argument to take a more measured approach that includes risks that Amazon has to overcome: Tough COVID Comps, inflation (wages, materials, services), supply chain hiccups, and now FX from the rising USD.
Also…Jeff is taking apart a historical bridge so he can jam his megayacht through a canal which didn’t excite too many people…
Under the Radar
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HIGH CONVICTION, HIGH GROWTH. The largest real estate owner for Central and Southern California just announced that Greenbriar Capital is its highest-conviction high-growth investment! With debt-free ownership of 995 homesites in Southern California adding $150M of net present value, Paul Morris’ valuation puts downside at 5%, and upside at 1000%*!
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2. Facebook Earnings 👉 The power of gateways
The Facebook earnings quarter was one of the most drastic pivots in market sentiment in a mega-cap company in the history of ever. It was almost like they got Blockbuster’d, or Kodiak’d if you will, but not quite to such a harsh degree.
Meta immediately got downgraded back to Facebook and is now trading BELOW pre-covid levels… There were four major headwinds in the quarter:
1. Rising ad targeting/measurement headwinds largely driven by Apple privacy changes around IDFA (ID For Advertisers)
2. Slowing impression growth as the company mix-shifts over the short-form video (i.e. Reels)
3. Ongoing macro challenges (inflation, supply chain) impacting marketers
4. User/usage competition from TikTok.
The big one for me is number one there. For those unaware – Apple came out with a policy called IDFA (ID For Advertisers) which essentially screwed anyone that does mobile advertising on an Apple device. Tim Cook body-slammed Zuck by limiting the amount of information that Zuck can collect.
Facebook has made its bag by providing extremely contextualized data on individuals when it comes to what makes them tick. What do you think Advertisers will pay more per eyeball for targeting:
A white male living in Miami who likes bitcoin, checks his phone 10 times per hour, posts things like “TO THE MOOON,” “LETS TAKE DOWN THE HEDGIES”, rents a Lambo and makes a video about how he owns it, wear Gucci flip flops. Or…
A person in the world aged 16-35.
Yeah, probably the first one…
Context matters because conversion matters. Limiting the amount of data that Facebook can collect lowers the value of the eyeballs delivered. Although Facebook might actually pull off the metaverse, their business is still massively over-leveraged to advertising.
I first heard about the troubles of IDFA through the grapevine talking to a lot of small business owners that were trying to target potential customers on Facebook. The conversion rates plummeted, the cost structure was all out of whack, and it didn’t seem to be getting fixed soon.
This is a fundamental shift in the underlying business of Facebook. This is a real problem.
We also all saw those creepy documentaries on how Facebook feeds dopamine hits and how specific the targeting is. I wouldn’t be surprised if this public smashing of Facebook was orchestrated by Apple all along. You know why? Try bringing up an anti-monopoly dispute against Apple, when you’re Facebook and saying you need access to more metadata. Good luck. Cook playing chess, not checkers.
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. BUT WHY?!?! 👉 Macro and Fundamental Differences
Let’s think about what we know. Inflation is here, supply chains are still tough, the economy is opening back up as people slowly return to physical stores to shop, and as more people return to physical stores to shop, advertisers will spend more trying to capture the interest of those customers.
If you took the above as gospel, then looked at the divergence between AMZN and FB, a gambling man would probably bet the opposite of the actual outcome. The point to make here is that nuance matters.
A very micro-level and company-specific catalyst is the reason for the breakdown in Facebook. Apple implementing IDFA was a direct shot at FB. Sure it affected a lot of other advertising businesses as well, but none as much as Facebook due to its over-reliance on mobile advertising.
Sure ads are a portion of Amazon revenue, but they have entire other categories. Sure ads are a part of Pinterest’s revenue, but that is also an ecom business. Facebook is an ads business, and an ads business alone (until they monetize Whatsapp or actually create the metaverse).
Amazon’s quarter was one of a different tale. Because it deals so heavily in the physical infrastructure world, there are so many macro components that people were expecting to very negatively impact the company – like inflation and supply chain problems.
What Amazon showed was resiliency in the areas that could have been trouble, as well as growth in areas that were more insulated from the macro environment. Diversification of revenue streams matters in times of duress, and Amazon has this in spades.
4. How GRIT’s Playing it 👉 Long Amazon, Sell Facebook (Meta? Whatever…)
For those that follow me on Instagram, you know I sold my Facebook last week. For those that don’t follow me… quit sleeping at the wheel.
I think anytime where the thesis changes, irrelevant of price action, it’s time to get off a name. For now, there’s just a bit too much hair on the story for me to justify continuing to hold the stock. I might come back to the drawing board if the advertising risk is mitigated, or another solid revenue line is introduced.
I also have been long Amazon for quite some time. This is a classic economies of scale game – but the most exciting component for me is that Andy Jassy, former head of cloud is now at the helm. This shows that management will be growth-oriented looking forward.
Whenever you have a narrative violation, the market gets a bit uneasy. I think one of those narratives over the tech bull run has been that “Oh the mega-cap cant enter a steep bear market because they are so cash flow generative, and actually trade at reasonable multiples.”
FB and AMZN:
I think such a drastic dispersion of stock performance in the mega-cap names is setting the stage for the next decade. In a higher rate environment, capital does not blindly flow towards tech stocks anymore. Fundamentals at the business operation level are going to matter more than they ever have which means one thing:
Do you’re homework, and pick them right. Or… subscribe to the paid version of my newsletter and let me do that for you.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
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