Alphabet & Amazon – Over and under

Alphabet Q2 19

Cloud and Pixel lift Alphabet over the bar

• Alphabet reported strong Q2 19 results as Google Cloud and the Pixel 3a put the icing on a steady performance by the core business.
• Q2 19 revenues / EPS were $38.94bn / $14.21 compared to consensus at $38.21bn / $11.17.
• Almost all of the beat was driven by Other revenues which consist mainly of Google Cloud and Google Hardware.
• The Pixel 3a appears to have been Google’s biggest success to date as it drove Pixel shipments to increase by more than 100% YoY.
• However, it is worth noting that this was not very difficult as this is the first time that Google has launched a device at this time of year meaning that shipments in Q2 18 would have been very low.
• The real story of the quarter was Google Cloud which reached around $2bn in revenues for the quarter.
• This places Google very far behind the leader Amazon which generated $8.4bn in revenues at AWS but it is closing a little bit of the gap.
• I suspect that Google Cloud is really going to struggle to be much more than an also-ran in this space but it may provide Alphabet with a source of extra growth while the core business continues to slow down.
• The outlook for Alphabet remains steady for 2019 meaning that it remains a safe-haven for the nervous.

Amazon Q2 19

Back to old habits

• Amazon reported disappointing earnings as it could not resist trashing its own profitability again in order to secure longer-term user loyalty and stickiness to its e-commerce platform.
• Q2 19 revenues / EBIT were $63.4bn / $3.08bn compared to consensus at $62.6bn / $3.71bn.
• Guidance was also soft with Q3 19 revenues / EBIT expected at $66bn – $70bn / $2.1bn – $3.1bn somewhat adrift of consensus at $67.4bn / $3.71bn.
• Just as the market has gotten used having its patience rewarded with margin improvements, Amazon has gone back to its old tricks of investing for growth.
• This time it is investment in one-day delivery that has proven to be more expensive than expected which has led to pressure on profitability going forward.
• This really underlines my view on Amazon as a story of good company bad stock.
• The valuation continues to demand that investors pay upfront for profitability that is fleeting at best and hostage to Amazon’s whim.
• This is why I continue to steer clear of a position in this company preferring to look for more reliable upside elsewhere.