GOOG, AMZN & SNAP – 3 Black marks

AMZN & Snap struggle. GOOG is just fine.

• Performance relative to expectations drove the earnings of Amazon, Google and Facebook obscuring that at least in Alphabet’s case, the results themselves were very respectable.

Alphabet.

• Alphabet reported good results, but the weight of growth expectations left the market wanting more, resulting in a softening of the shares in after-hours trading.
• Q3 18 revenues-exTAC / EPS were $27.2bn / $11.86 (adjusted for $1.20 EPS profit from accounting standard changes) compared to expectations of $27.3bn / $10.45.
• Effectively the revenues were in line with a handsome beat on profitability mostly thanks to a lower tax rate, but because growth has decelerated to 22% YoY from 26% YoY in Q2 18, the skittish market thinks that the party is over.
• When a company reaches the size of Alphabet, start-up speeds of growth become impossible and so I think it is entirely normal that things will slow down from here.
• The net result is that Alphabet is continuing to dominate its market which combined with good results from cost control, leaves the outlook pretty bright.
• Of all the ecosystems driven by advertising, I think Google is the least exposed to the current privacy and data backlash (see here) making it my top choice in this space.

Amazon.

• Amazon reported weak Q3 18 results as it missed revenue expectations and guidance causing yet another round of worries about the valuation of the shares.
• Q2 18 revenues / EPS were $56.6bn / $5.75 compared to forecasts of $57.1bn / $3.11 where almost all the focus is being placed upon revenue.
• Guidance was also disappointing with Q4 18 revenues / EBIT forecasts to be $66.5bn – $72.5bn ($69.5bn) / $2.1bn – $3.6bn ($2.9bn) both below estimates at $73.8bn / $3.9bn.
• The fear now is of a pause in revenue growth while the next round of investments such as Wholefoods and PillPack are ramped up such that they are able to impact the numbers.
• This means higher expenses and lower profits (again) just as the market was getting used to Amazon making a little bit of money.
• I think that this pattern is here to stay and with its sky-high valuation, I see no reason to buy the dips.

Snap.

• Snap produced another set of horrible results pushing itself even closer towards the forced acquisition I have been predicting (see here).
• Snap reported Q3 18 results in which it lost users but did monetise that it has left more effectively.
• Q3 18 revenues were $298m above the consensus estimate of $283m but it still lost $325m during the last 3 months of which $133m was represented in operating cash outflow.
• RFM thinks that even with 186m users, Snap should be able to earn $363m in quarterly revenues, meaning that there is still space for growth.
• However, if users are declining, it is an extremely worrying sign and very soon this will be more directly reflected in its revenue performance.
• Snap put the user losses down to problems with its Android App which it obviously made available to its users much too early.
• Furthermore, it is pinning its 2019 growth and profitability hopes on appealing to the older generation who are far more attractive to advertisers.
• However, Facebook has long since signed up most of these users to its regular app as well as Instagram, meaning that this strategy will be really difficult to execute.
• Hence, I think that this malaise will continue until the shares get to such a low level that one of the big digital ecosystems swoops in and forcibly acquires the company.
• Although I am not desperately keen on either Twitter or Snap, I would have Twitter over Snap any day of the week.