Extreme Moment Is Here
FANG stock reactions could be more important than their earnings reports because ServiceNow raised its guidance and fell. That being said, for the most part, the reports were better than some thought they’d be. Interestingly, AWS did miss sales estimates, but the stock rose after hours anyway. Sentiment is so positive; it’s unlike anything most have even seen.
Latest tagline of this market is we went from 1929 to 1999 in 4 months. In other words, we went from a sharp decline with fears of a depression to extreme speculation. A CNBC commentator stated we’re in a “can it possibly get better than this moment.”
It’s worth noting that online shopping picked up because of COVID-19. The market is expecting none of that to be given back to in person stores when the virus goes away. Researchers are saying we’ve made 10 years worth of gains in a few months.
People will fly again and go to the store when this is completely over. Craziest reaction we heard to Amazon’s report was that someone said they want to burn their valuation books. On the one hand, avoiding Amazon in the past few years based on valuation was wrong. On the other hand, now it does make sense to avoid it.
Facebook had big user growth and profit weakness because people stayed home and went on social media, but there weren’t as many advertisers spending money. Facebook owners should be because it will likely lose users when this is over.
Normally it’s unheard of for it to lose users, but this entire year has been unprecedented. Specifically, the company earned $1.80 per share which beat estimates by 41 cents. It had $18.7 billion in sales which beat estimates by $1.3 billion.
Facebook had 1.79 billion daily active users which beat estimates by 90 million. As you can see from the chart below, there were 2.7 billion monthly active users which rose from 2.6 billion which was also the consensus. Fact that there were only 3 million more American users shows how saturated it is.
It’s highly unlikely to improve upon that next quarter which matters because these users have the highest ARPU. Revenue per users was $7.05 which beat estimates for $6.76.
The firm said, “More recently, we are seeing signs of normalization in user growth and engagement as shelter in-place measures have eased around the world, particularly in developed markets where Facebook’s penetration is higher.” It’s simple; there won’t be user growth next quarter. User growth was the strongest in Asia Pacific and the rest of the world.
Even if America doesn’t get back to normal, the rest of the world will. Best part of the quarter was that the boycott from a few major firms didn’t have a big impact. That’s because small and medium sized businesses are more important than a couple large ones.
Small firms don’t have a website, so they make Facebook and Instagram accounts. The firm guided for 10% sales growth in Q3 which beat estimates for 7.9% despite the boycott. In response to this quarter, the stock was up 6.5% after hours which would be a new record high if it sticks.
Amazon Rises Despite Modest AWS Weakness
It was right to say that AWS sales growth would fall. Personally, I said it would fall from 33% to between 25% and 30%. It came in at 29%. However, it was wrong about that mattering because the rest of the company did so well. If this was a normal quarter, such AWS sales growth would be a disaster, but not in a pandemic.
Online sales were amazing even though Prime Day was postponed. It was like as if everyday was Prime Day. The firm had $10.30 in EPS which beat estimates for $1.46. It had $88.91 billion in sales which beat estimates for $81.56 billion. These results made the estimates look ridiculous.
Online grocery sales tripled as the firm increased capacity by 160%. Investors shouldn’t expect this to continue. They view it as an acceleration of a previous trend, but that’s a temporary bump due to an extreme event.
Prime Day is going to be in October which is interesting. It’s like a pre-holiday shopping event. The firm expects 3rd quarter sales to be from $87 billion to $93 billion which represents 24% to 33% sales growth. It expects operating income from $2 billion to $5 billion.
Since the predicted range for AWS growth was 25% to 30%, it was mildly impressive as growth fell less than Azure. Even still, it’s concerning that the firm’s main cash cow is decelerating even though the stock has a triple digit multiple.
Cloud competition is going to heat up over the next few years because of all the capital that has flooded the market chasing every single SaaS company. Other sales were $4.22 billion which represents 41% growth. That’s the advertising business. Subscriptions, which is mainly Prime, had sales of $6.02 billion which is 29% growth. 3rd party sales were up 52% and first party sales were up 48%.
This is an interesting market. Tech companies just testified in front of Congress that they aren’t monopolies and then they reported blowout earnings. It was wrong to be so bearish on these firms. But some investors are not backing down because the trade is extremely crowded, their growth is slowing, and they are expensive.
There were so many earnings reports, we didn’t even get to the fact that the dollar and the 10 year yield are crashing. Dollar index is at $92.62 which is a 7% decline in the past 3 months and the lowest price since May 2018. 10 year yield is down to 52 basis points. This could be an all-time record low if it closes at that on Friday.
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