Quick Thoughts: Jeff Bezos and Mark Zuckerberg Don’t Care About Your Stupid Quarter!

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–          Amazon slightly missed consensus sales and earnings estimates, barely turning a profit, but sales were up 29% despite the global economic situation.

–          The story remains intact – low margins because of investment against huge opportunities.  E-tail dominance unchallenged, but platform and media plays remain risky.

–          Facebook met sales expectations with 32% YoY growth, but posted an unexpected loss and offered no guidance for future quarters beyond a significant rise in operating expenses.

–          With usage shifting rapidly to mobile platforms, Facebook is stymied by the control that Apple, Google and Microsoft have over their platforms.

 

Amazon and Facebook offered very little insight to help investors make confident forecasts of future results.  SHOCKER!  Amazon shareholders have come to expect this sort of treatment from management, although the track record of growth is fairly astounding given the company’s $50B annual run rate as a retailer in the worst global economy of most investors lifetimes.  The story is the same as it ever has been: “We are investing pell mell to attack opportunities.  Profits will come later.”  Every once in a while, Amazon posts a margin surprise, like 1Q12 when it delivered nearly $200M in operating earnings, seemingly to prove that it can and tease investors of the times to come.  Times when Amazon is done building distribution centers, done selling tablets at below cost, and done giving its media products away for free to customers who pay the $79 annual fee to avoid shipping charges.  It’s easy to be skeptical, but the opportunities are huge and I think Amazon is uniquely well positioned for much of it.  I’m not optimistic for the future of Amazon’s device platforms, but there is no obvious candidate to slow Amazon’s march to the sea in retail.

Facebook, on the other hand, has no reason to be quite so cocky.  Yes, revenue was up 32% YoY, but decelerating sharply during what should be the hypergrowth phase for the company.  Google, which posted 21% YoY growth and delivered 26% operating margins, trades at about 5.4x ttm sales and 18x ttm earnings, not adjusting for net cash.  Meanwhile, Facebook trades at more than 15 times sales and more than 120 times earnings, while generating revenues less than a 10th the size of Google’s.  Facebook needs to explain how it will be able to reaccelerate its top line growth and keep it going, despite an obvious shift of its user traffic to mobile platforms where it has not demonstrated an ability to generate revenue.  The answer so far of “We’re working on it” is not being well received by investors.

I think Facebook finds itself in a bit of a box. The mobile market is very different from desktop.  There is no neutral browser window for users to lazily keep open to Facebook.   Instead there is an app that you open to view Facebook and that you close as soon as you are finished.  Apple and Google integrate new functions right into the platform with each release, cherry picking opportunities that Facebook might want for itself.  Arguably, the app model is breaking the social networking opportunity into bite sized chunks – can Facebook swallow the future Instagrams as they pop up?  Apple demands a cut on every bit of revenue that flows through iOS, so partnering with Cupertino is intrinsically a revenue limiting move.  Zuckerberg is wisely ruling out a phone of his own, but the quandary remains: where is the revenue going to come from?

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