Amazon's earnings report; TKO Group stock presentation from the 17th annual Pershing Square Challenge
1) I'm surprised that Amazon (AMZN) shares aren't up more today after the company reported blowout first-quarter earnings after the close yesterday...
You can see the full earnings release here and conference call slides here, but below are the highlights:
- Net sales grew 13% year over year to $143.3 billion, beating expectations of $142.6 billion.
- Operating income and net income more than tripled year over year. This chart from the conference call slides shows operating income for the past five quarters:
- The highly profitable Amazon Web Services ("AWS") business led the way. This next chart from the slides shows AWS sales and operating income over the past five quarters:
- Operating cash flow soared 82% from $54.3 billion to $99.1 billion for the trailing 12 months ("TTM"), while capital expenditures ("capex") were nearly flat. That led to an explosion of free cash flow, as you can see in this chart from the slides:
- Advertising revenue, which is nearly pure profit, grew 24% year over year to $11.8 billion.
But in the wake of these great earnings, Amazon's stock is only up about 3%. So why isn't it up more?
This Wall Street Journal article, Amazon Sales Surge as Company Focuses on AI, cites a number of reasons:
Amazon is dealing with multiple challenges, including a new wave of competition from fast-growing e-commerce companies and an antitrust lawsuit from the Federal Trade Commission that could seek a breakup of the company.
In January, Amazon was forced to end its takeover deal with robotic vacuum maker iRobot after European officials planned to block the acquisition. Amazon also is facing an order from the U.S. Consumer Product Safety Commission that could make it responsible for the safety of goods that it sells for outside vendors on its website and ships for them through its logistics network.
The article also notes that investors are concerned about how much Amazon is planning to spend to keep up in the artificial intelligence ("AI") arms race:
Investors have paid close attention to AI spending levels at the world's largest technology companies, punishing those whose path to profitability is less clear. Alphabet's Google, Microsoft and Meta Platforms all forecast significant capital spending increases, with Meta saying it would boost spending by up to $10 billion to support its AI investments. Meta shares fell more than 10% after it issued a relatively disappointing revenue forecast for the second quarter.
"We expect the combination of growth and high demand for GenAI to meaningfully increase year-over-year capital expenditures in 2024," Chief Financial Officer Brian Olsavsky said on the conference call.
He said the $14 billion in capital expenditure during the first quarter will be the low point for the year. The majority of the spending will be on AWS infrastructure and generative AI investment.
Amazon now has an enterprise value approaching $1.9 trillion, with TTM sales of $591 billion and net income of $37.7 billion. That means the stock is trading at 3.2 times revenue and about 50 times earnings.
Those are all big numbers, but Amazon is a juggernaut. And it's growing earnings so fast that it's only trading at 33 times next year's estimates of $5.29 per share (which will likely be revised upward after yesterday's report).
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) Yesterday I was one of the judges at the 17th annual Pershing Square Challenge, which was established by my friend Bill Ackman of Pershing Square Capital Management.
Each year, two dozen three-person teams of first- and second-year Columbia Business School students develop stock pitches. The five finalists present to a panel of judges, which this year included Bill, me, and five others. We awarded the winning team $100,000 and the second-place team $50,000.
I was incredibly impressed by all five presentations: not just the winner, long Valvoline (VVV), and the runner-up, short Pool Corporation (POOL), but also short Academy Sports and Outdoors (ASO), long Vail Resorts (MTN), and long TKO Group (TKO), which owns wrestling giant WWE and mixed martial arts powerhouse UFC.
Each group of students did extraordinary in-depth work over many months – crunching numbers, visiting stores, and speaking with company executives, industry experts, and competitors.
I asked the students if they would allow me to share their presentations with my readers and three have already said yes.
Today, I'd like to start with the presentation on TKO – prepared by John Morcos, Bhakti Thacker, and Gilles Nkana-Batake – because these students were the first to send me their slides.
In doing so, keep in mind that I'm not recommending the stock – if that were the case, I would be sharing it first, along with our full analysis, with Stansberry's Investment Advisory subscribers. Rather, I learned a lot about an interesting company and industry, which I thought my readers would enjoy as well...
The students started with an overview of TKO:
They then outlined why the stock has underperformed since the merger, falling 6% while the S&P 500 Index has risen 13%:
They then argued that investors aren't sufficiently optimistic about the company's prospects in three areas and that, if things play out as they expect, the stock could rise to $177 per share in two years (it's currently around $95 per share):
I thought their analysis on their first point was particularly good, showing how important UFC is to the most likely buyer, ESPN:
They argued that ESPN is likely to pay more for UFC than the market is expecting because there are many other deep-pocketed bidders:
Again, I'm not recommending the stock... but I'm definitely adding it to my watch list.
If you're interested in learning more, you can see the entire 97-page presentation right here (shared with their permission).
Thank you, John, Bhakti, and Gilles for sharing your excellent work!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.