Amazon & Twitter – Risk off!

One good, one bad exemplifies how unbalanced risk is in big tech.

Amazon – Permanent pandemic

• Amazon reported excellent results as the shift towards online shopping that was accelerated due to the pandemic appears to have changed people’s habits.
• Q1 2021 revenues / EPS were $102.5bn / $15.79 comfortably ahead of forecasts of $104.6bn / $9.61.
• The core retail e-commerce platform was the main driver of the 44% YoY revenue growth as the other main business, AWS, grew at 32% meaning that Microsoft’s Azure continues to close the gap.
• Advertising is also becoming a substantial business with a 77% increase in revenues to $6.9bn.
• This is in line with Facebook and Google who also have seen a strong bounce in digital advertising but raises questions with regards to Twitter (see below) which missed out.
• Guidance for the coming quarter is also pretty strong with Q2 2021 revenues / EBIT expected to be $110.0bn – $116.0bn / $4.5bn – $8.0bn both ahead of consensus at $108.5bn / $5.8bn.
• The only weakness to be seen in the whole report was the share price which rose 2% in after-hours trading.
• Compared to the strength of this report, this is a pretty meager reaction which underpins my view that the risk-reward in the FAANG names and big tech is now very much skewed to the downside.
• Had Amazon missed consensus by the same amount, I suspect that the shares would have fallen by 10% or more.
• This implies that holding these names does not offer a good balance between upside and downside risk.
• I continue to fish around in the unpopular, ignored value end of the market for bargains.

Twitter – in line but smacked.

• Twitter reported results that met expectations but the shares got hammered in a clear example of how badly the risk-reward balance is towards the downside.
• Q1 2021 revenues / EPS were $1.04bn / $0.08 came in slightly ahead of expectations of $1.03bn / LOSS$0.02 while DaUs came in at 199m only just below consensus of 200m.
• This represented YoY growth of 29% as opposed to the better than 40% YoY reported by its large-cap peers.
• The reason for the lower growth has been known for years which is that Twitter is a very narrow offering and only touches a small part of users’ Digital Lives.
• This means that its opportunity for monetisation is much less than it is for Facebook, Google, or even Amazon these days.
• This is why when there is a bounce in video-related or social network-driven advertising, Twitter misses out.
• This is exactly what these results have shown and it comes as no surprise.
• Twitter is supremely good at advertising the traffic that it gets but it just does not get enough of it in order to see the kind of bounce that its peers did in Q1 2021.
• What is most telling about these results is that the shares were hammered to the tune of 11% because Twitter had the temerity not to beat expectations.
• I suspect that If it had beaten expectations the rally would have been 5% at most given how rich the valuation of the company already is.

Take-Home Message

• The message being sent by this results season to investors is clear.
• A substantial beat of expectations by big tech will result in a small rally but woe betide anyone who trips up and fails to report blowout numbers.
• Pinterest was another one that reported good numbers but sounded a note of caution on its outlook and got smacked with a 14% decline in its share price.
• With the risk-reward balance so tilted towards the downside, I can see no reason to be invested in the FAANG names or big tech.
• Their best share price performance appears to be well behind them.