A look at earnings reports from Amazon and Match Group

1) Regular readers know that I've long been bullish on Amazon (AMZN)...

Along with Meta Platforms (META) and Alphabet (GOOGL) – which I just discussed on Thursday last week and this past Wednesday, respectively – I've consistently liked Amazon's stock ever since I named it as a core holding in my old firm Empire Financial Research's first newsletter on April 17, 2019.

Since then, through yesterday's close, it's up 156% versus 110% for the S&P 500 Index.

And now, Amazon just reported strong fourth-quarter earnings yesterday after the close. (You can see the full earnings release here and investor presentation here, and this new Wall Street Journal article has more details: Amazon Earnings: Shares Fall After Sales Outlook Is Weaker Than Expected.)

Year over year ("YOY"), net sales grew 10% (11% adjusted for foreign exchange) to $188 billion and net income rose 88% to $20 billion – both beating expectations.

This chart from the investor presentation shows how profits have grown in the past year:

The highly profitable Amazon Web Services ("AWS") business led the way. This next chart from the presentation shows AWS's net sales and operating income over the past five quarters:

Advertising revenue, which is nearly pure profit, grew 18% YOY to $17.3 billion.

It's mind-boggling that one of the largest companies in the world, with $638 billion of sales last year, is growing its top line at double-digit rates while also expanding margins – leading to an explosion in profits.

So why is the stock down 4% this morning? Two reasons...

First, guidance for revenue (a range of $151 billion to $155.5 billion) and operating income (a range of $14 billion to $18 billion) for the first quarter came in below Wall Street's expectations.

Second, as with Microsoft (MSFT), Alphabet, and Meta, investors are worried about Amazon's surge in capital expenditures ("capex") – driven by the AI arms race.

In the fourth quarter, capex nearly doubled from $14.6 billion to $27.8 billion ($83 billion for the year), and the company said it expects to spend more than $100 billion this year.

Amazon now has an enterprise value of $2.5 trillion. With trailing-12-month ("TTM") sales of $638 billion and TTM net income of $59.3 billion, the stock is trading at 3.9 times revenue and about 42 times earnings.

Those are all big numbers, but Amazon is a juggernaut.

So if I owned the stock, it would be a comfortable hold... And if I didn't, I would look to buy on any meaningful pullback.

2) I shared my analysis of online-dating company Match Group (MTCH) in my November 8 e-mail, the day after the stock tumbled 18% in the wake of the company reported disappointing third-quarter earnings. As I concluded in that e-mail, the stock was:

... too cheap for a company with very attractive economic characteristics – high margins and low capex – that dominates its sector and is likely to continue to do so given strong network effects.

Hinge continues to grow like a weed, and there's plenty of room for online dating to grow. Only 37% of U.S. adults have ever used an online-dating site or app (and only 7% currently use one). Even among 18- to 29-year-olds, those figures are only 56% and 13%, respectively.

Tinder is shrinking slowly, but much of this is because Match implemented safety features to reduce scammers. This measure improved the user experience, but reduced users over the past year. Going forward, it should start to grow again.

And as I continued:

This could lead to a rerating of the stock – and a quick double.

And if the stock remains depressed, share repurchases will become even more of a meaningful tailwind.

Lastly, there are three smart activist investors pushing for change: Starboard Value, Elliott Investment Management, and Anson Funds Management. You can read the letter Starboard sent to the company on July 15 here. I think they have good ideas to restart growth.

Since then, Match's struggles have continued...

On Tuesday, the company announced tepid fourth-quarter earnings (you can see the executive commentary here). Year over year for the quarter, revenue declined 1% on a 4% decline in the number of users, partially offset by a 3% increase in revenue per user.

Match's operating margin fell from 30% to 26%, resulting in a 14% decline in operating income.

Lastly, the company announced that it was replacing CEO Bernard Kim with former Zillow CEO Spencer Rascoff.

In light of all this, you might be surprised to hear that the stock up 13% since I wrote about it on November 8.

The reason is simple: The stock was too cheap.

How a stock performs isn't primarily driven by whether a company reports good or bad earnings, but by what its earnings are relative to expectations.

After badly missing third-quarter earnings, Match's shares – and future expectations – were in the dumps. So shares rallied nicely over the past three months and only gave back part of the gains when the company gave guidance slightly below expectations when it reported fourth-quarter earnings this week.

I continue to like the stock. Match remains a cash-flow machine, generating about $882 million of free cash flow ("FCF") last year, and used 85% of that (roughly $753 million) to buy back 7% of its outstanding shares.

The company plans to use at least 75% of this year's FCF to repurchase 5% to 7% of its shares, so I think there's a win-win for investors: The stock remains cheap, allowing the company to repurchase more shares (which mitigates the downside risk)... or the stock goes up.

Best regards,

Whitney

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