A review of Amazon's earnings and valuation; Meta Platforms needs to prove its AI investments will pay off; The Pick-A-Ticker Competition for my favorite charity, Robin Hood; My birthday and the New York City Marathon this weekend; Happy Halloween
1) In yesterday's e-mail, I said I would cover Amazon's (AMZN) earnings report today and that I expected a "blowout quarter."
Sure enough, Amazon delivered, and shares jumped more than 12% this morning.
As background, Amazon has been a longtime favorite of mine – along with Alphabet (GOOGL) and Meta Platforms (META), whose earnings I covered yesterday.
On April 17, 2019, I named all three stocks as core holdings in the inaugural issue of my former newsletter, Empire Investment Report, at my old firm, Empire Financial Research.
Since then, Amazon is up 165% versus 135% for the S&P 500 Index.
Let's take a look at the company's third-quarter earnings report... (You can see the full earnings release here and investor slide presentation here.)
Net sales came in at $180.2 billion, slightly above expectations of $178 billion. That equates to 13% year-over-year ("YOY") growth (12% when adjusted for foreign exchange rates).
Amazon is one of the largest companies in the world, with a staggering $691 billion in trailing-12-month ("TTM") sales. So it's incredible that it continues to grow its top line at double-digit rates while also expanding margins, which has led to booming profits...
Earnings per share ("EPS") jumped 36% YOY to $1.95, crushing expectations of $1.57 per share.
This chart from the investor presentation shows how profits have grown over the past year:
The highly profitable Amazon Web Services ("AWS") business led the charge, posting 20% revenue growth. That's an acceleration from 17.5% YOY growth in the second quarter.
This next chart shows AWS's net sales and operating income over the past five quarters:
Advertising revenue, which is nearly pure profit, contributed hugely to net sales. This segment grew 24% YOY to $17.7 billion.
Amazon's guidance for the fourth quarter was solid: CEO Andy Jassy said the company continues to see "strong demand in AI and core infrastructure."
For the next quarter, management projects revenues of $206 billion to $213 billion. They also project operating income of $21 billion to $26 billion. Both midpoints are slightly above analyst estimates.
Finally, let's turn to valuation...
This morning's opening price was around $250, and EPS estimates for this year are $7.25 ($6.87 going into earnings, plus the $0.38 beat). That means Amazon is trading at 34.5 times current-year earnings.
That's a rich multiple. But it's warranted for a company this dominant, with so many levers to pull to grow margins.
Barring a recession, I think the company can increase revenues at a double-digit rate and grow profits at more than 20% annually for many years to come.
As such, Amazon continues to be a favorite of mine for the long term.
2) Following up on Meta Platforms, this Wall Street Journal "Heard on the Street" column captures why the stock fell yesterday despite strong earnings... Investors are skeptical that Meta's massive investment in AI will pay off:
Several analysts quizzed Meta's executives during its earnings call Wednesday about how the stepped-up investments will actually pay off. In a report following the call, Nat Schindler of Scotiabank said the company "will need to see a bevy of new revenue streams to validate their capex ramp."
The article goes on to detail Meta's investments, which are reaching an "eye-popping level":
Capital spending of $72 billion this year will equate to 37% of the company's projected revenue. That is the highest relative spend among its megacap tech peers, and doesn't even account for the nine-figure offers [CEO Mark] Zuckerberg has been splashing on top AI researchers. Meta said Wednesday that total expenses will grow at a "significantly faster percentage rate" next year relative to the 23% jump expected this year.
Investors have been treating Meta as an AI winner thanks to its heavy investments as well as Zuckerberg's aggressive cutting of costs elsewhere. The stock has surged nearly 500% since ChatGPT launched three years ago, vastly outperforming bigger tech rivals save for Nvidia (NVDA).
But the latest results – and the reaction in after-hours trading Wednesday – show the blank check investors have written to the Facebook parent might have an expiration date after all.
I'm willing to give Zuckerberg the benefit of the doubt. As such, I continue to like the stock.
3) One of my favorite charities, Robin Hood, has an annual fundraiser called the "Pick-A-Ticker Competition." Participants who donate $10,000 get to submit one long and one short stock idea, which are then tracked over six months.
The deadline for this year's competition is 4 p.m. Eastern time today, so it's not too late to enter.
I'll share the participants and their picks when they're released next week.
Last year's winner, with a return of 352.5%, was Pershing Square's Bill Ackman. He picked the Federal National Mortgage Association (FNMA), or Fannie Mae, for his long stock. And his short, which was limited to sectors rather than stocks, was in financials.
Here's last year's list of all the participants, their picks, and the results.
4) I'm really looking forward to this weekend: It's my 59th birthday tomorrow, and then to (hopefully) prove I'm still young, I'm running the New York City Marathon on Sunday.
I only decided to run it 10 days ago, so I trained like a madman through yesterday. And now I'm resting for two days.
I just picked up my bib yesterday – I'm No. 54961. You can download the NYRR app to track me – I'm starting in the last wave at 11:30 a.m.
Here I am last night at the finish line:
Wish me luck!
And Happy Halloween from my babies, Rosie (the Wonder Dog) and Phoebe (the Wonder Pup)!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.