Microsoft and Amazon – 2 for 2

Microsoft and Amazon both had good nights on Thursday.

• Amazon posted fantastic sales but lousy profitability while Microsoft was bailed out by enterprise once again.

Amazon

• Amazon reported Q3 revenues / EPS of $17.1bn / LOSS $0.09 compared to consensus at $16.7bn / LOSS $0.09.
• Guidance was very wide with revenues of $23.5bn-$26.5bn and EBIT of LOSS $500m to $500m forecasts. Consensus has revenues at $25.89bn.
• This is a great sign for a good Q4 which much of the technology industry badly needs but profitability continues to drag.
• The promise of Amazon is that one day costs will stop rising and the company will actually show a profit as sales continue to expand.
• There was no sign of this is quarter as margins remained pressured by the continued investments in logistics.
• Amazon Prime saw good growth in subscribers with “millions of new subscribers added” but the company stopped short of mentioning how many it has.
• Given, the $79 fee, I suspect that the subscribers are probably somewhere around 10m.
• This is great for user loyalty but the numbers are way too low if the company wants to become a proper ecosystem.
• Apple and Google have somewhere around 300m each meaning that Amazon will have to change the way Prime works if it wants to be relevant in the ecosystem world. (see here).
• The essential problem is that picking, packing and shipping is a variable cost meaning that as revenues rise, costs also rise.
• For the shareholder, this is no good at all as the company badly needs to see some operating leverage to fulfil its promises and justify its valuation.
• I remain pretty lukewarm on Amazon as I don’t like paying for promises that are yet to be kept.

Microsoft

• Microsoft reported Q1 revenues / EPS of $18.53bn / $0.62 that beat forecasts of $17.79bn / $0.54.
• Commercial products and services was the real driver of revenues and more than made up for the weakness in consumer products where sales fell by 7.4%.
• Surface also fared better than expected generating revenues of around $400m.
• I would estimate that this equates to around 1m units and is double what the company shipped last quarter.
• This was a result if the very heavy price cuts that Microsoft has put through to try and shift the unwanted inventory.
• With the new product launched, prices have gone back up again and the older product is now obsolete.
• Hence, I would expect that this quarter will show another disappointment.
• There was no real guidance but Microsoft indicated that Q2 revenues would probably be greater than the $21.1bn consensus estimate.
• Things are looking better for the next quarter and beyond as PC declines are slowing meaning that continued strength from the corporate sector should start to affect the figures to a greater degree.
• Microsoft remains good value for the investor and offers the only real alternative ecosystem to Google or Apple.
• Yahoo! and Microsoft remain the only stocks to look at when investing in ecosystems.