How To Parse Quarterlies On Amazon, Facebook And Microsoft
You’d think corporations like Amazon AMZN with a market capitalization far north of a trillion bucks would publish quarterly reports of more than bare-bones numbers with zero interpretive commentary. But, you’d be wrong. Amazon adds insult to injury with next quarter analytical guidance that is always a low-ball concoction, totally worthless.
The analytical fraternity pretty much is uniformly bullish on Amazon as a stock, but peculiarly silent on hard numbers, particularly for earnings. Quarterly earnings misses of 20% or more persist, period after period. What’s more, nobody comes up with earnings estimates covering forward 12 months or next three years.
Analysts missed the flattening-revenue curve at Alphabet and underestimated Facebook’s revenues growth and current earnings power. Facebook’s midyear quarterly smothered the reader with numbers, commentary surprisingly muted on headwinds for advertising revenues related to Covid-19.
At Facebook, there are two major initiatives that are outsized relative to the size of the company. The research and development expense line is massive relative to its revenue base. Facebook’s R&D expenditure exceeds 20% of revenues, actually closer to 25% for the June quarter. On revenues of $18.6 billion, R&D was $4.4 billion, the major-cost line equal to marketing and administrative costs, combined. There’s never any management elaboration of research priorities and how this could impact viewership numbers or whether it’s for diversification into other internet sectors.
Noted is share-based compensation runs at a $1.7 billion quarterly clip of 25% of pretax-operating income. This is a huge bite even for a tech house. Some comparison: R&D at Apple AAPL runs around 7% of sales and share-based compensation about 10% of operating income. Admittedly they are in different fields, but maybe Facebook’s spend reflects what it takes to hang on to its user base of more than half the world.
Apple is still largely a products rather than a services business. Historically, consumer appliances producers sell at no more than a market multiplier. This reflects the historical perspective that it’s tough to maintain primacy in sectors like color TV, photography and data transmission.
Facebook’s employment rolls continue to expand at a breathtaking clip. Headcount rose year over year at a 32% rate. Where are all these people put to work? Are they entry level or professionals? What is the average pay scale and age? Are they fresh out of college? ¿Quién Sabe? I’m curious, but it’s indicative of management’s aggressive mindset to stay mum. There are white boards hanging in corporate digs which ask “what would you do if unafraid?” The answer, obviously, “almost anything.”
I remember a white-male standard poodle show dog, Pete, who would snatch the blue ribbon awarded to him the show ring and parade around on hind legs, ribbon in mouth. Facebook reminds me of Pete. Net, net, you accept Facebook’s culture or don’t, but you’re always on the outside looking in.
“Don’t tell ‘em much until you’re ready,” is Amazon’s point of view, too. Withholding info until ready to make a splash is obvious and demeans its followers. Analysts, of course, dare not speak out to deplore Jeff Bezos’s behavior. They’d lose any limited access still available.
At least, Amazon’s lead sentence in their quarterlies deals with the advance in operating cash flow which is my key metric in its valuation. Trailing 12 months’ operating cash flow levitated 42% to $51.2 billion. Free cash flow rose to $31.9 billion, over 25%. These are snappy numbers. Better still, quarterly revenues rose 40% and net income doubled to over $10 a share.
I resisted not reading any further and slap a 30 multiplier on operating cash flow. This alone would justify the $1.5 trillion market capitalization which is what we’re dealing with today. On my horseback numbers, Amazon sells at 25 times forward 12-months operating cash flow, enough to keep me in the stock with a major position.
I own twice as much Microsoft MSFT because it’s analyzable along traditional yardsticks of Ebitda and earnings per share. Amazon’s revenue base internationally is approaching a $100 billion rate, but it brings nothing as yet down to the bottom line. Are they sacrificing gross margins to build their footprint? For how long? No comment. Never any comment. This is the big-splash tactic? Wait until your numbers shine and then hit the Street with both barrels.
This is what they did with their cloud business. I’m too old to put up with such foreplay. The AWS Cloud business is now a major profit center, over a $3 billion quarterly operating income rate. Impressive, but no commentary on competitive forces in the business. You’ll have to go elsewhere to find out how long the good times may last.
When I step back and look at tech’s five-year price run, mid-2015 to mid-2020, Amazon’s ahead 386%, but Microsoft is close by, up 360%. Facebook’s far back, a lousy triple, the Nasdaq 100 Index just a double.
Microsoft is a horse of a different color. What you get is what you see. Operating income for the June quarter rose 8% to $13.4 billion. Stock-based compensation latest 12 months ran at a 12% clip, about half of Facebook’s spend. Depreciation is a big number here, nearly 30% of net income. Latest 12 months’ net-operating cash flow of $60.8 billion rose a comfortable 15% or so.
On Microsoft’s present market capitalization of $1.6 trillion we’re talking a 26 multiplier for after-tax operating cash flow. Relative to the S&P 500 Index’s normalized earnings Microsoft’s at 1.5 times the market. That’s enough to keep me firmly in the stock, which has doubled latest 12 months. Microsoft is well balanced – not a Covid-19 casualty. Personal computing and iCloud segments prospered while transitional-licensed business slowed along with LinkedIn because of the weak job market.
If allergic to buying the Nasdaq 100 Index, Microsoft is your good proxy. By comparison, Amazon discounts more than the next 12 months’ numbers, maybe three years’ worth.
Sosnoff and / or his managed accounts own: Amazon, Facebook, Microsoft, Alibaba BABA and Apple.