Both Amazon and Facebook reported quarterly earnings late last month. Whilst many might favour Amazon over the company formerly known as Facebook, there are strong counter-reasons to the argument.
FACEBOOK – a Meta bet?
Facebook reported better-then-expected profits while missing revenue targets and added a similar figure to its expectations on what Q4 would look like. It also continued its stock buyback efforts by adding $50 billion to the fund, which helped lift its shares by about 2% in extended trading. The company added a new segment called Facebook Reality Labs, which will work on Augmented Reality (AR) and Virtual Reality (VR) products and services. The other segment will focus on its apps: Facebook, Instagram, Messenger, WhatsApp, et al. It expects the Reality Labs segment to impact operating profits for 2021 by $10 billion. Its ad business, meanwhile, remained healthy and growing.
CEO Mark Zuckerberg kicked off the earnings call with a very combative and vehement defense of his company, following an onslaught of news reports built on leaked documents provided by whistleblower and former employee Frances Haugen which purportedly showed the company taking no action, despite the harm done by social media on children, particularly teenage girls. He dismissed these actions and the resulting outrage as “a coordinated effort to selectively use leaked documents to paint a false picture of our company.”
In the final days of the week of the earnings release, Facebook officially ceased to exist. More precisely, the company renamed itself “Meta” to highlight its work in building the metaverse, i.e. immersive digital worlds in which multiple people can interact within a 3D environment, as part of its evolution into the next generation of social media connectivity. Many a joke and jibe were and continue to be heard from all over the world.
Despite the headwinds it faces, there are a number of encouraging signs for Facebook/Meta:
Amazon: Not In Its Prime
High contributions to the company’s bottom line made by its AWS (its cloud computing division) over the past several years meant Amazon has always had significant dry powder to maintain its humongous lead in e-commerce via promotions, delivery time ramp-ups, promotional campaigns, subsidising exclusive brand offerings, etc.
Shortly before its Q3 update, Credit Suisse cut AMZN’s target price by more than 10%. A quick analysis of the company’s segment information over the YTD vis-à-vis the consolidated annual reports reveals a fascinating trend in its financials, particularly its Expense Ratio (i.e. net expenses versus net sales):
In this particular quarter, there were some indications that the company’s priorities were out of order – despite being in inflationary times, which Treasury principals say will last (at least) till mid-2022: an additional hiring of 125,000 workers at enhanced wages was announced before the update, along with another 150,000 seasonal workers in Q4. Intensifying competition by Microsoft, Google and Oracle against its stalwart AWS business seemed to receive neither specific attention nor remedy during the update.
The Q3 update held no surprises with respect to the aforementioned trend in financials:
Despite owning a studio subsidiary set up (Amazon Studios), a free streaming service (IMDb TV) and allegedly signing 10-figure deals to make theatrical movies, the company continues to subsidise these activities within its existing business setup, thus confounding the already-fraught margins of the e-commerce division and writing up multibillion-dollar loans on the backs of the AWS division.
The company, also predictably, made no reference to the fact that India’s antitrust body has found damning evidence that Amazon copied products and rigged search results to promote its own brands in the country. The “India story” was supposed to be the company’s growth driver, just like China was supposed to be before the company had to close shop after 15 years of trying.
Given, there could be several arguments for shorting Amazon but the most prominent ones would be:
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He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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