Apple, Amazon, Alphabet – A is for awful

Bad numbers for expensive stocks  

• Apple, Amazon and Alphabet all reported disappointing results and promptly gave up the gain they enjoyed yesterday thanks to the Fed’s more dovish tone when it came to discussing interest rates.

Apple FQ1 23 – Expensive stagnation.

• Apple reported a decline in revenues that were largely triggered by supply chain disruptions but also guided badly as, just like everyone else, the economy is causing people to hold onto their old devices for longer.
• FQ1 2023 revenues / EPS were $117bn (down 5.5% YoY) / $1.88 below consensus estimates of $122bn / $1.95 and more of the same is expected in FQ2 2023 in terms of YoY growth.
• The supply constraints that have hit iPhone particularly hard are expected to be alleviated resulting in a bounce, but this is expected to be more than offset by other products like iPads and Macs being hit hard by the economic malaise.
• Services continued to grow but slowed to 6% YoY indicating that all of the weakness is down to how often users feel that they can afford to upgrade to a new device.
• Looking at the iPhone 14, Galaxy s23 and others the answer is that users can easily afford to wait as there is not that much that is new or different in the new devices that are a must-have.
• Hence, I think 2023 is going to be another soft year where replacement rates continue to be slower than normal.
• Against that backdrop, Apple will struggle to grow earnings this year which combined with its puny dividend makes it an expensive place to invest in stagnation.

Alphabet Q4 2022 – Unjustified panic

• Alphabet only just missed expectations but the obvious and needless panic about OpenAI eating Google Search for lunch was enough to rattle investors who marked the shares down 3% after-hours trading.
• Q4 2022 revenues-exTAC / EPS were $63.1bn / $1.05 just shy of estimates of $63.2bn / $1.19 as the advertising business is now far too big to escape the impact of the weak economy.
• To make matters worse, Google will now rush to release a competitor to ChatGPT based on its LaMDA language model which is not a good sign.
• Rushing something like this to market easily leads to a debacle like the one Microsoft endured with Tay which was enticed to become both racist and bigoted by badly behaved users in a highly amusing incident.
• OpenAI has armies of bodies in emerging markets making sure that ChatGPT does not go off the rails which is yet another sign that this technology is far away from where everyone thinks.
• OpenAI also does not have to report to the market and seems to have an aversion to making money all of which makes this a pointless avenue to pursue.
• It also strongly implies that Google does not have confidence in its own prowess and abilities, but feels it has to prove itself to stop the share price from going down.
• Furthermore, ChatGPT is built on technology (transformers) that Google invented giving me confidence that Google can quite easily come up with something just as good if not better in its own time.
• I have argued that Google Search is not at risk from OpenAI & ChatGPT (see here) which can’t even keep its product readily available and is also unable to handle the most basic mathematical concepts that my 7-year-old can deal with (see here).
• This is a perfect example of how these large language models have no causal understanding whatsoever of any subject upon which they are asked to discuss or opine.
• By contrast, Google Search is contextual, timely and relevant and I do not see any reason for it to be under threat from this any time soon.
• However, that does not mean that Google’s shares are fairly priced which with a pretty difficult 2023 ahead from a growth perspective, continues to look expensive to me.

Amazon Q4 2022 – Clouds gather

• Amazon reported reasonable results but the abrupt slowdown of its cash cow AWS from 40% to just 20% is well behind rivals and is a serious ding to sentiment.
• Q4 2022 revenues / EPS were $149bn / $0.03 which met revenue consensus of $146bn but missed EPS consensus f $0.17.
• The culprit here was AWS which has decelerated far more than its smaller competitors and thereby contributed less than expected to profits.
• This is a problem going forward as Amazon regularly relies on the stunning performance of AWS to bail out the less-than-stunning profitability of its e-commerce businesses.
• Furthermore, it does imply that competitors (especially Azure) are gaining market share faster than ever before given that Azure is growing a full 10% points faster than Amazon.
• Amazon said that it would be focusing on cost reductions for the balance of this year, but this did not manage to offset the general disappointment.
• To be fair, the shares have run very hard into these numbers and so it was ripe for a correction, but that does not mean that I want to invest.
• Amazon shares demand far more from investors than many of its competitors do and I continue to think that Alibaba represents a far better risk-reward trade-off.
• Alibaba trades at less than a third of the multiple of Amazon and manages to transact more business.
• Furthermore, China is ripe for a big economic bounce as President Xi badly needs a win after his blunders with Covid Zero and so I think he is going to order rates to be cut and the economy to be stimulated.
• Alibaba is a prime beneficiary of this whereas Amazon is not.