Google & Amazon Q4 20 – Good companies, mediocre stocks.

Good results from the pandemic drive a pull forward of digitisation.

Google Q4 2020 – The big pull forward

• Google’s advertising machine roared back to life in Q4 2020 with great results highlighting an acceleration of the trend to digital rather than signalling an overall economic recovery.
• Q4 2020 revenues-Ex TAC / EPS were $56.9bn / $22.30 handsomely beating estimates of $52.9bn / $15.72.
• A big part of the sudden jump came from circumstances forcing companies to adapt to a new way of doing business with online suddenly becoming a much bigger part of their business overall.
• Google has been a direct beneficiary of this supplying its advertising clients with insights that have helped them target their business more effectively in their new-found circumstances.
• For example, Google was able to tell Lufthansa which routes users were looking at so that it ensure that it was able to meet that demand as well as it could given current limitations on travel.
• Google Cloud also benefitted from this trend and grew 47% YoY which is good, but compared to its peers it is not really gaining market share against Microsoft and remains in a very distant 3^rd place despite a healthy backlog.
• The outlook is for a resumption of the steady growth seen in past years albeit at a higher absolute level given the sudden COVID-related shift to digital.
• The growth in H1 2021 will be much higher than in H2 2021 given the easier comparisons.
• In the medium term, I am more cautious as the normalisation of society with vaccines and as it learns to live with COVID will mean a bounce-back of the offline world.
• This is where I think the market action is going to be found when the spring comes.
• Hence, I think that growth will be harder to come by in 2022 and beyond and at 31x 2021 PER this is largely priced in.
• I am not averse to owning Google but I would not be rushing out to buy it either.

Amazon Q4 2020 – Arrival

• Another great quarter from Amazon was overshadowed by uncertainty with Jeff Bezos stepping back from the CEO role which helps Amazon to better justify the multiples upon which it trades.
• Q4 2020 revenue / EPS were $125.6bn / $14.09 well ahead of estimates of $119.8bn / $7.13.
• All parts of Amazon were firing on all cylinders with domestic growing 37% YoY, International at 57% YoY and AWS at 28% YoY.
• Profitability is also being allowed to incrementally improve which is what allowed Q4 2020 EPS to beat expectations.
• This trend has been going on for some time now and profits are starting to become far more consistent than they have been historical.
• Furthermore, with the stock going sideways since September, this means that rising earnings are starting to bring the valuation towards levels that are far more acceptable to an old-fashioned value-oriented investor like me.
• Amazon is now on 72x 2021 PER which is still too high but far more reasonable than the 100x + it has traded on for the last few years.
• This is a trend that I can see continuing with the shares going nowhere and the earnings growing into a more reasonable valuation.
• Amazon is last fulfilling its promise of making money, but the share price action is telling you that one should sell as the company arrives at its long-promised destination.