Amazon Q1 2023 and Intel Q1 2023– Dog day

Amazon – Darling has a dog day.

• Amazon reported good results but then went on to warn that cloud growth would slow which reversed a 12% rally to a 2% decline in after-hours trading.
• Q1 2023 revenues / EPS were $127.4bn / $0.31 ahead of forecasts of $121.6bn / $0.20 which were expected to be missed explaining the 12% rally when the results were published.
• However, during the conference call, Amazon’s CFO warned that growth at AWS Q2 2023 would be some 500bp below the 16% it reported in Q1 2023 which came as a big shock.
• This is especially the case as Microsoft reported a 27% YoY growth in its Azure business and spoke confidently about robust growth going forward.
• This is deeply troubling as AWS is the profitable growth engine that is financing the losses in e-commerce which now appears to be losing share to Azure.
• Amazon put this down to cost optimisation at its customers but one can’t help wondering why Amazon is seeing this and Microsoft is not.
• One possibility is the generative AI craze currently sweeping the economy with every man and his dog looking at ways to incorporate generative AI into their business and, at the moment, the gold standard is ChatGPT.
• This is exclusively being hosted by Azure and so this could be one reason behind the relative strength differential, but I am not convinced that generative AI is big enough yet to account for this difference.
• Hence, I think that Azure continues to gain ground on AWS more generally which is of concern especially as Amazon is trying to reduce costs and be more profitable.
• Cost cutting has seen some results as expenses rose by 8.7% YoY in Q1 2023 compared to revenue which grew by 9.4% expanding margins slightly but it does highlight just how little operating leverage Amazon has.
• Amazon’s philosophy is to obsess about its customers but the excellent service that it does offer means that there is not that much left over for shareholders once customers have been taken care of.
• Furthermore, Amazon is miles behind in the generative AI trend and had to rely on its millions of customer end-points with Alexa to support its claim to AI excellence.
• The reality is that I think that Amazon is not very good at AI, never has been and is way behind in the generative AI race, meaning that its position is very weak in contrast to management commentary that it is well positioned.
• This does mean that it won’t suffer as much as everyone else when the bubble bursts, but for now, this is a weakness in its story.
• The valuation continues to be unattractive especially as Microsoft continues to eat away at its lead and the economic outlook remains difficult.
• I continue to avoid this one.

Intel Q1 2023 – The dog has its day.

• Intel managed to convince investors to look through its horrible performance in H1 2023 to a recovery in H2 2023 which I am not convinced will materialise.
• Q1 2023 revenues / Adj-EPS were $11.7bn / LOSS$0.04 ahead of estimates of $11.1bn / LOSS$0.14 but guidance for Q2 2023 was not great.
• Q2 2023 revenues are expected to be a little better at $11.5bn – $12.5bn compared to forecasts of $11.7bn but the company will still be loss-making even on an adjusted basis at Adj-EPS of LOSS$0.04 compared to $0.02.
• Gross margins will remain in a terrible state at 37.5% in Q2 2023 compared to consensus at 41% and very far shy of happier days when the company earned 60%+.
• Intel’s factories remain underloaded underlining yet again why I remain nervous with regard to semiconductor companies that own factories.
• Pat Gelsinger however, did a reasonable job of papering over the cracks in stating that Intel sees the inventory correction ending in H2 2023 and that normal seasonality will set the company up to see a better second half.
• This has given the market some confidence that the worst is over, but I am not so sure.
• Qualcomm is close to shipping a chip that is supposed to compete head-to-head with Apple’s M-series of processors which currently lead the computing industry by a wide margin.
• Fortunately for Intel, the M-series is only available for Macs but this one will be available for Windows and Qualcomm and Microsoft have been working on optimising hardware and software for a few years now.
• If this new family of chips lives up to expectations, it will represent a dire threat to all Intel shipments into the laptop market which make up around 75% of all PC shipments globally.
• Qualcomm has been slower than expected to ship this product and it remains to be seen how good it is, but this is a major potential negative for Intel.
• It also continues to lose share to AMD in the server space and so I think that until Intel gets its house in order, predictions of better times in H2 2023 may be short-lived.
• I continue to think Intel can go lower before it goes higher as the risk-reward trade-off here remains skewed to the downside.