Microsoft & Amazon – Different days

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Microsoft and Amazon have a very different day.

Microsoft FQ2 16A.

• Microsoft reported steady results as Office 365 and cloud services more than offset the weakness in the PC market.
• FQ2 16A revenues / Adj-EPS were $25.7bn / $0.78 compared to consensus at $25.3bn / $0.71 and RFM at $26.5bn / $0.71.
• Adoption of Windows 10 continues at a better pace than Windows 7, with 200m active devices and usage of those devices also showing encouraging signs.
• Bing reported some progress in gaining 1% point of share to 21% in the US Search market but 30% of Bing’s search revenue now comes from Windows 10 devices.
• Given that Windows 10 makes up less than 15% of Windows devices in the market, this implies that the usability improvements are encouraging users to interact with Microsoft’s services to a greater degree. .
• This bodes well for the adoption of Microsoft as the go to ecosystem for Digital Work but the questions marks around Digital Life remain.
• Both Office 365 and Azure grew far faster than the corporate average and it was these two businesses that drove stronger than expected revenues.
• Guidance for Q3 16E was in line with expectations with revenues of $21.6bn – $22.2bn just shy of consensus at $22.2bn but further progress on expenses and optimism on the cloud won the day.
• I suspect that there was also considerable relief that the outlook for the coming quarter was less impacted by economic volatility than many had feared.
• The net results was 4% rally in the shares in after-hours trading.
• Microsoft’s stock has had a difficult start to 2016 but these results indicate that it is likely to weather difficult times better than average.
• Microsoft’s progress on the consumer ecosystem remains slow and hesitant but fortunately the valuation demands no success at all.
• Hence, there remains plenty of upside if it gets it right but still some upside even if it does not.
• This is why I continue to like the stock going into 2016.

Amazon Q4 15A

• I consider Amazon to be a true unicorn but one that has a habit of stabbing itself with its horn.
• Amazon once again dashed the market’s hopes by returning once again to investment mode at the expense of profits.
• The result of this slip was a 13.4% decline in the share price I after hours trading.
• Q4 15A revenues / net income were $35.7bn / $743m well short of consensus at $36.0bn / $1.3bn.
• The revenue miss was almost entirely due to the strength of the US$ but the real problem was profits which missed expectations by 43%.
• Amazon’s continued push into faster fulfilment as well as technology and content investments did the damage as both of these saw increases as a percentage of revenues.
• Amazon Web Services put in a mighty performance growing 69% YoY to $2.4bn with operating margins of 28%, but seeing as this is still a very small part of revenues its positive impact was minimal.
• Q1 16E guidance was also soft with revenues / EBIT of $26.5bn – $29.0bn / $100m – $700m well short of consensus at $27.7bn / $800m.
• Amazon has two truly mighty machines: its retail offering and Amazon Web Services and both of these are doing very nicely.
• However, it is the other areas that need urgent attention.
• The profits from these two power houses are being spent on a haphazard series of experiments and futuristic thinking for which there are virtually no results no date.
• For these experiments to pay off, Amazon has to think about how to put these investments together in a way that creates a cohesive, integrated and delightful experience for users outside of online shopping.
• This means that Amazon needs to understand the importance of the Digital Life ecosystem and of this there is no sign.
• Consequently, I think that Amazon’s outlook remains as haphazard as its strategy making for more wild swings on results days.
• At 110x 2016E PER, there is absolutely no room for error making this a stock to avoid this year.
• Apple’s earnings are far more reliable and are more than 90% cheaper making it the obvious choice when choosing between these two.