Quick Thoughts: AMZN and GOOG – Looking for Some Investor Love


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–       AMZN jumped nearly 9% after hours after turning in a surprise $0.45/share profit, while GOOG held serve on a nominal miss caused by a 4% YoY FX hit and a few one-time items.

–       AMZN was typically cryptic, but highlighted strong growth in Prime and its recent price increase as drivers of the EPS upside.

–       GOOG’s sales and earnings would have topped consensus w/o FX effects, and cost-per-click would have been up slightly YoY. Management highlighted investments in ad tech that are driving sales

–       AMZN may be out of the woods with investors for the time being and GOOG may be ready to take the next step with its big initiatives in ad tech, e-commerce, and the digital home

TMT heavyweights AMZN and GOOG capped off a busy week in earnings with topline misses, while the former delivered an unusually high earnings beat sending shares of AMZN as high as 13% in the after hours session. GOOG dipped a couple points on the earnings release but reversed course after the call with the stock up 1.4% as a messy quarter was brought into context. Like their tech peers that reported earlier in the week, both AMZN and GOOG also reported FX issues, with impacts of -4% to their toplines. Both would have easily topped consensus revenue otherwise. For AMZN, the earnings surprise shows Bezos is answering the bell, not because of Wall Street, but to avert retention issues when it comes to his employees. For GOOG, the second straight miss taken in context of a quarter with unusual FX headwinds and large one-time real estate investments shows the business is otherwise continuing the course dominating digital advertising.

AMZN in typical fashion didn’t really tell us much despite beating the consensus EPS number by $0.28. Without giving investors a base for Prime subs, the company told us they were up 53% globally and 50% in the US, indicating faster growth abroad. This, along with the nugget dropped just after the holidays that it added 10M Prime subs during the holiday season suggests sub rolls are now well above 30M, and likely closer to 40M. Management appeared to attribute the strong results primarily to the company’s Prime program as members are better customers for Amazon, buying more from the company and giving it significantly greater insights into their purchasing habits. In addition to Prime, we note that shipping costs, a very significant cost factor to Amazon’s core business, were down sharply relative to revenues in the quarter. Net Shipping costs were back down to 4.6% for the first time in seven quarters, and a likely driver of the return to profitability. The company attributed this to leverage during the holiday quarter, but the move was far more than typical seasonality and gives investors reason to hope that Amazon can sustain a better cost structure going forward.


Investors were also cheered by Amazon’s intention to break out its AWS web hosting business in future earnings releases. AWS, which makes up most of the North America “Other” reporting segment, saw a healthy 24.6% sequential and 42.7% YoY increase despite stumbling earlier in the year on aggressive price competition from the other webscale platforms to the tune of 40-60% price cuts. This business, responsible for a considerable piece of the company’s $4.9 B in annual capex, is in the lead against an opportunity that could reach hundreds of billions in dollars over the next decade. If Amazon hadn’t decided to break it out, no doubt the SEC would have made them do it anyway.

But Amazon of course continues to aggressively invest back into the business. Hot the heels of its Golden Globe wins, the company is going deeper into Hollywood and will begin to produce and acquire movies for theatrical release and early distribution on Prime. It also continues to evolve its delivery services, offering Prime Now same day delivery service and AmazonFresh in large urban markets like Manhattan. With new services, more content, and of course more computing equipment for AWS, CAPEX hit the $4.9B mark, up 42% from last year. While Bezos will leave some profit on the table to appease investors, don’t expect too much. His top two priorities are growing the topline and keeping his employees from leaving. With that, I expect some upside for at least a few more quarters.

Turning to GOOG, the company missed on both the top and bottom lines reporting $18.1B in gross revenue against expectations of $18.5B and EPS of $6.88 missing expectations of $7.10. For GOOG, it was a messy quarter, especially in light of FX volatility. International revenues, which had trended up to 58% of revenue, were back down to 56% as the Euro, Yen, and Pound all lost ground to a strong dollar over the quarter. Had rates been constant with the previous quarter, revenue would have been $541M higher. With last year’s rates, it would have been even greater with $616M in added revenue. Ex-TAC, FX had a 420 bps impact on the topline. Google, like most other companies with significant international operations, has currency hedging programs in place, though they don’t protect revenue, rather profit. To this end, Google’s hedges paid off with a $148M benefit that flowed through to the bottom line. There were also questions of spend affecting profitability. CAPEX grew 47% sequentially and 57% YoY as the company made one time real estate investments in the range of $900M to buy more office space. With CFO Patrick Pichette’s detailed explanations around one time real estate expenditures, the stock moved into positive territory.

With the unusual circumstances of the quarter explained, the core business looks healthy and stands to benefit from the GOOG’s investments boosting ad tech capabilities. Echoing the FB call last night, GOOG management is also poised to deliver better metrics to advertisers tracking user behavior and engagement delivering tools that help advertisers know exactly when people view ads. The quarter also featured solid performance for the core business with paid clicks growing in the double digits on Google properties, while CPCs were obviously off because of FX. Network sites showed the opposite trend, with growing CPCs and declining paid clicks as GOOG tries to shift more advertising to its own properties. Despite the headwinds, the company delivered 18% growth on its core site ad revenue. The other revenue bucket, which includes revenue from products like Chromecast, Chromebooks, Google Fiber, Nexus devices, etc., decelerated relative to previous quarters, but was still up 19% YoY. The company notes strong demand for the Nexus 6 has resulted in shortages and the Chromecast continues to deliver. With a bunch of initiatives on the verge of becoming bigger deals, we expect this category to pick up again.

After the cautious response to Facebook’s obvious beat, the positive reaction to Google’s more nuanced quarter is a bit of a surprise. I think that it boils down to Google’s management having made a better case that it would be a more thoughtful steward of shareholder interests. This quarter’s miss was about FX and one-time items and investors appear convinced that one-time items will be one-time and that investments in new businesses will be monitored. Perhaps the “adult supervision” rubbed off.

For our full research notes, please visit our published research site.

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