Apple & Amazon – Mixed bag.

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Plusses and minuses in both reports.

Apple FQ1 18 – relief rally

• Apple reported good results where a 14.5% increase in iPhone ASPs allowed revenues to remain strong despite weakness in volume shipments.
• FQ1 18 revenues / EPS were $88.3bn / $3.89 beating expectations of $87.6bn / $3.85.
• The main driver was once again the iPhone which shipped 77.3m units missing expectations of 80.2m units by 4%.
• This was more than made up by a 14.5% increase in ASPs to $796 which is what drove revenues to beat the bullish expectations set before weakness in iPhone X shipments become apparent.
• This effect however will not carry through into FQ2 18 as Apple is forecasting revenues of $60bn-$62bn some 7% below expectations of $65.6bn.
• Apple also said that in FQ2 18 that iPhone revenues would increase by at least 10% in an attempt to sooth fears with regards to iPhone X demand.
• I think that this is a statement of the obvious as Apple has a 15% YoY increase in ASPs to play with meaning that shipments can still decline YoY in order to make this guidance.
• iPhone X demand clearly been softer than expected mostly due to the very high price being demanded for the product and I think that this form factor will fare much better once Apple pushes it into its cheaper products and works out how to get rid of the notch.
• With these results and the outlook for FY 2018, I think that Apple has done enough to qualm the fears of long-term holders but at the same time, I don’t see new money rushing into the company.
• Hence, I think this one will perform broadly in line with the sector this year.

Amazon Q4 17

• Amazon reported another mighty quarter and one in which it managed to make some money despite its very aggressive push into India.
• Q4 17 revenues / adj-EPS were $60.5bn / $2.19 compared to consensus at $59.8bn / $1.83.
• AWS was once again the powerhouse of profit generation with growth at 45% and margins holding steady at 26%.
• It is worth noting that Microsoft is closing some of the gap on Amazon, as it managed to grow 98% YoY in the last 12 months albeit from a much lower base.
• I suspect that it is this pressure that is preventing AWS from making the most of its scale and increasing its profitability as its revenues expand.
• Most of AWS’ profits were consumed by the very aggressive market grab going on overseas and particularly in India.
• Losses were approximately the same in Q4 17 at $919m (-5%) as they were in Q3 17 $936m (-7%) where I estimate that India is losing roughly $700m per quarter.
• However, the domestic business generated $1.7bn in EBIT which allowed Amazon to report better than expected profits company wide.
• Amazon is also clearly feeling the heat from Google which pulled out all the stops at CES and backed that up with a big jump in support from makers of smart home devices.
• The result is that Amazon will be ramping up investments in the Alexa voice platform, but money alone will not buy the brain power needed to keep Google at bay.
• I have recently reversed my position on the battle for the smart home (see here and here) with Google Assistant now looking like it will eventually win.
• Pressure on AWS and Alexa is one thing, but the core business is going from strength to strength and there seems to be very little to challenge Amazon in e-commerce in developed markets.
• That being said, I still struggle with the valuation of Amazon given its distain for making money and consequently it is still not a story I want to get involved in long-term.
• If push came to shove, I would have Apple over Amazon.