Welcome back everyone. Today on the Joseph Carlson Show
we get into the biggest earnings week of this season.
This is it, the most important one by far.
There are trillions of dollars worth of market cap reporting
earnings this week and we can take a look at the schedule.
This is the weekly outlook on earnings.
We start off here on the left with Monday.
We work our way to Friday and the most important days are
Tuesday through Thursday. For example, jumping into
tomorrow on Tuesday. We have a couple companies here
that are familiar. We have S&P Global and Spotify
reporting earnings. S&P Global is still today my
largest position across both my portfolios.
It is massive and there's a reason why I'll be going over my
expectations of this company going into tomorrow as well as
we have Spotify. This is a company that I've
outlined is one that's on my watch list.
It's a top consideration. I'll be going over some
predictions with Spotify and the reason that I believe this
company deserves the premium it has.
Moving on to Tuesday after market close, we have some other
other big companies that are reporting earnings.
For example, we have Visa. I'm going to combine this one
with MasterCard that's reporting Thursday market open.
So I'll be looking at both of these companies.
I'll be giving some thoughts on them.
And then we also have Tuesday after market close, we have
Booking Holdings, another massive company.
This one's been a very successful investment in My
Portfolio so far. And one interesting thing about
Booking, this company faces what could be considered multiple
disruptions. For instance, it's a travel
company and travel supposedly under pressure, and it's a
company that's supposedly being pressured by LLMS that can plan
vacations. But regardless of both of those,
Booking Holdings is in the green year to date.
So why does this company continue to go up despite all
odds? We'll be going over that.
Moving on throughout the week, we get to Wednesday, and this is
the first massive day of the week.
Wednesday after market close. We have Microsoft and Meta both
reporting earnings at the same time.
We're going to be giving a full outlook.
I own a lot of Microsoft. I don't own any Meta.
I'll be going over the biggest thing investors should be
looking for for both of these companies.
And then Thursday after market close, we have Apple and Amazon
both reporting earnings at the same time.
I recently sold the majority of my Apple steak for a large
profit. That was an incredible
investment. But Apple faces far more
challenges today than they did a few years ago.
And Amazon remains one of my most significant bets.
It's a massive holding in My Portfolio.
It makes up roughly 40% of the story fund.
And Amazon faces a lot of questions this quarter over the
tariffs. This is a jam packed, crucial
week for the market. And the market so far, even
despite the uncertainty of the tariffs, has staged the
beginnings of a comeback. It looks like it's headed back
up and if this week goes well and certain things play out,
there is reason to believe the market could make a full
recovery. We'll be going over what needs
to happen for these companies to rise once again.
So we have all of that to get into plus more and we start
things off by looking at this week.
When we look at the calendar Monday, really not a lot it's
going on today. We don't have too many important
earnings. It really starts to begin on
Tuesday, tomorrow before market open.
We have S&P Global reporting their earnings and this has been
a key company in My Portfolio. If we bring up the passive
income portfolio here, we can see my position in S&P Global.
It's in the financial category and this company is a very large
position, $105,000 holding with $23,000 being in the green.
So I have a substantial exposure to it in this portfolio.
If we load in the story fund, which is my secondary portfolio,
one of the five companies that I've picked is S&P Global,
another $20,000 invested another 4300 in the green.
So I have this one across both portfolios because I really like
this company. S&P Global is a compounding
machine through and through. It has a very durable
competitive advantage through multiple aspects of its
business. It's deeply entrenched in the
system, the financial system of the entire globe.
It has worldwide scalability. It also generates significant
and growing free cash flow every single quarter and the
management team is aligned with the shareholders.
They don't generate this cash flow just to give it back to the
employees like some companies. I'm a shareholder.
I want a company that will treat the shareholders right.
So when I look at S&P Global, this is a company that I believe
fits well within My Portfolio. That's why I have so much
exposure to it. Now going into this earnings, we
can bring up some information here.
When we look at the most important aspects to watch for
going into this earnings, we have a feature here that takes a
look at the most recent earnings report and shows us what this
company's focused on. A couple things that we can look
at is S&P Global had record-breaking performance in
2024. They forecasted 5 to 7% growth
in 2025. We need to see if they continue
with that forecast. They may throw in the towel.
They may say the future is too uncertain, we can't give
guidance. But I think that'd be very
unlike S&P Global. My belief is that they'll once
again reaffirm their guidance and in fact, they may even raise
it. I think there's a chance they'll
do that. They might.
They might not because of the tariffs.
They may say it's too uncertain. But I certainly don't think
they're going to lower guidance. I would be surprised if they did
that. The other thing is the Market
Intelligence segment recovery and growth.
The reason that this is outlined is number 2 is this is the
weakest part of S&P Global and it's also the biggest portion of
revenue. The key indicators for the
Market Intelligence segment include revenue acceleration and
margin stabilization, particularly as the division
works through cancellation headwinds from 2024 and faces
heightened pricing pressure and competition.
So this segment of the business is under pressure and if we look
at S&P Global and the revenue by segment, the market intelligence
is this dark orange part, kind of the burnt orange there at the
bottom. So it makes up a big portion of
the company. And what they're basically
saying is they're facing a lot of competitive pressures,
specifically from companies like Bloomberg or Fax Set.
There's other data providers outside of S&P Global, and
they're all competing for the same customers, for the same
clients. Now, S&P Global notes that Q4 of
2024 highlighted the improved retention rates, strong
annualized contract value, and successful competitive wins, but
notes that the first half of 2025 remain muted before showing
gradual improvement. So basically, it's warning right
here that this next quarter could be slow once again for
market intelligence. Now #3 we have the resilience in
the growth of the rating business in 2024.
It highlights that it was an atypically strong year.
It did better than expected. S&P Global outperformed in this
segment of business. And the question is, can they do
it again? Well, since this, we've had
Moody's report earnings and their ratings business actually
did really well. So this should not be a problem
for SP Global this quarter. I think the ratings business
will be strong. Number four and five are focused
around generative AI being implemented across the entire
organization, basically changing how all the company operates and
creating new products and how all of this will ultimately
impact the revenue growth and the margins of the company.
Those are the two primary things we should see from AI.
We should see faster revenue growth and we should see margins
go up. Employees should be able to do
more with less. If you have artificial
intelligence, if you have Gemini and ChatGPT, you are more
efficient. You get things done quicker.
You answer your own questions much faster.
That makes you a better employee.
That makes it so that you can accomplish more tasks in the day
and across an entire massive organization.
That should mean that it's more profitable.
Revenue should grow faster. So this is something that we
want to see show up in the numbers we've had AI implemented
over the past year. We want to see actual margin
increase, the same amount of employees accomplishing more and
the organization able to launch more products generating more
revenue. Another thing I'll add to it is
it trades at a historically very cheap valuation.
It's at a 27 Ford PE ratio and a 3.73 free cash flow yield.
And if we put this in a historic Oracle context, in terms of
valuation in the past five years, it's trading towards the
highest free cash flow yield it has, meaning that it's one of
the cheapest price points you could buy it over the past half
a decade. So right now I think is a decent
time to own the company. I'm not concerned about S&P
Global's earnings at all. Now moving on, we get into
Spotify. This company also reports
tomorrow before market open. Spotify does miss on earnings
frequently. It misses about half the time.
So it's literally a coin flip of or not they'll beat on their
earnings per share estimate or their revenue.
In fact, on the revenue, it's even worse.
They miss more than half the time, well over half the time on
revenue. But it doesn't really seem to
matter with this company because this company is still kind of in
the phase of where Netflix was when they used to report
subscribers. All the investors care about is
the subscriber number, the amount of users every single
month. With Spotify, we have this is a
KPI on Qualtrim. We can look at the monthly
active users. We have that number right here.
Total it's 675,000,000 users and you can look at it grow quarter
over quarter, growing 12%. Here's the break up.
When we look at it through the free tear and the paid tear, the
free users are in the green pads in the purple.
But either way you look at it, whether or not you're just
looking at the premium or just looking at the ad supported,
both of them show consistent growth over time.
The amount of users that Spotify reports will be top of mind this
quarter. It's going to be more important
than whether or not they be on the earnings per share revenue.
Now another thing that Spotify has been focused on for the past
couple of years is the margins of the company.
The gross margins are incredibly important to this company and
they finally expressed operating leverage, something that the
company was under question about.
Investors thought that this company may not have any
operating leverage. They can't drive margins up and
Spotify prove they could, so in this quarter, gross margin
variability and profitability trends will be one of the major
focuses. Investors should closely watch
for changes in gross margins in Q1 of 2025 as management
indicated that margins will likely decline sequentially due
to seasonal weakness and investments in video and other
initiatives. However, improvements are
expected across the full year with both gross and operating
margins forecasted to rise, albeit at a slower paced in
2024's record expansion. So this quarter, gross margins
and profitability are going to contract a little bit towards
the end of the year. It's going to be even higher
under the subscriber game prediction, It says the prior
quarter saw record net additions and monthly active users and
premium subscribers, but the company forecasted a slowdown in
net ads for Q1 of 2025 due to seasonality and a focus on a
higher value, more engaged users.
Another important thing that investors in Spotify are looking
at is an acceleration in the pace of product launches, focus
on tailored subscriptions such as the Super Fan and hi-fi tear,
expansion of video, podcasts and personalized AI driven
experiences. The uptake of these innovations
as well as the effect on user engagement, retention and
average revenue per user will serve as key indicators for the
financial opportunities and the competitive positioning.
Spotify has even talked about more recently of launching an
even higher priced tear that has all these advanced features.
So they're really trying to push the pricing power.
The reason that I can't can't invest in Spotify today, and
I've tried to make it work, I've tried to look at investing in
this company, is when I type in different expectations.
For example, a 30% earnings per share growth rate for the next 5
years and a 30 times multiple. With those lofty assumptions,
30% growth rate 30 times multiple, I get a 3% return.
That's the only thing keeping me out of this stock.
I'd love to own it, but I just can't get behind these
assumptions. Spotify is a wonderful,
one-of-a-kind company, but I want to find it at a cheaper
deal. Now moving on throughout the
week, we get to Tuesday aftermarket close.
We have a couple big companies here, Visa and Booking Holdings
for Visa. I want to group this one with
MasterCard because it's reporting on Thursday and the
companies are very similar. This is the reason that I only
own one of them. I chose MasterCard, but the
companies have so much overlap that I didn't feel the need to
own both of them. If we look at the what to watch
for for each of these companies, number one for Visa is sustained
strong payment volume and revenue growth.
This is top of mind for investors.
The first thing they're going to be looking for with Visa.
If we look at MasterCard, my guess is it's going to be the
exact same sustained revenue growth and volume momentum, so
worded slightly different, but basically the exact same thing.
Investors want to look at the overall growth of these
companies. With every company reporting
earnings, you get an idea of what the expectations are, what
the economy looks like, their views on tariffs and how they're
impacting consumers. But then you have companies like
Visa and MasterCard, which are kind of the catch all.
They really are part of almost every industry, every
transaction. So they have more data than
anyone. Their input is simply weighted
higher than any other company. So investors want to know what
their expectations are going forward.
We're going to get a look of how cross-border looks, how many
people are going on vacation to Europe using credit cards,
spending money on e-commerce and travel, all these different
industries. We get an insight with Visa's
earnings, then we have value added services tokenization
expansion. This is like the other part of
Visa. Visa and MasterCard both are
basically half a network and then half value added services.
And most people aren't aware of the value added services.
If we look at MasterCard, they don't break it up into as many
categories, but the value added services last year was $10.8
billion and for the last year the payment network was 17
billion. So these value added services of
security Analytics, all the data, all the type of SAS stuff
they sell to these companies is worth a fortune.
Visa and MasterCard are both trading at reasonable
valuations, meaning they're not extremely expensive, they're not
extremely cheap. They're not my top buys today.
And I believe that this earnings season will be more business as
usual. They may note some various
levels of slowdown with some consumer spending like in
restaurants and pulling back from experiences.
But these are extremely resilient companies and I'm not
concerned about them going into these earnings.
Moving on Tuesday after market close, we also have Booking
Holdings reporting earnings. I have to mention that I do have
a large investment in this company.
It's been a really fun one to own.
Booking Holdings is a company that at first glance you may
think it's weak because it's just a travel company.
But really what they've done is they've aggregated a ton of
demand of of hotel listings and inventory in Europe.
They have a strategy where they have incredible marketing, they
aggregate demand. They have a seamless platform
and integration. Booking Holdings as of this year
is basically flat. It's down 1%.
So despite the fact that this company is seemingly under
pressure because travel may slow down with the tariffs, there's
less vacationing going on and under pressure because a lot of
LLM's advertising pitch is that they can plan a vacation.
Despite those two big disruptive factors, the stock remains the
same. How is that even possible?
Well, I can explain why Booking Holdings, despite all these
factors working against it, is so profitable that even though
some investors are selling their shares, reshifting their
portfolios, they basically buy the shares from you.
They do it with consistent buybacks.
And I believe that's the reason that this stock continues to
just be so strong despite uncertainty.
One of the charts here we have on Qualtrum really illustrates
this point. It's called the return of
capital. Now this isn't return on
capital. This is return of capital,
meaning the amount of money they pay back to shareholders.
If we look at it just over the past five years, this is what it
looks like over trailing 12 month basis, they've returned
roughly $8 billion back to the shareholder.
Through buybacks they did 6.51 billion, through dividends they
did 1.17 billion. So they are throwing money back
to the shareholder buying back shares.
Any shareholder that wants out of their position booking
holdings will buy it from you. Another thing to note about this
company is when they're buying back shares, they're not doing
it just to pay their employees. A lot of companies buy back
shares, but they also dilute the share count by paying employees
through heavy stock based compensated packages.
This company has a relatively low base level of stock based
comp because they have fewer employees.
So they paid out roughly $600 million in stock based comp out
of the $8 billion they return to shareholders.
So basically, the money that they're paying back to
shareholders is undiluted money, causing an enormous decline in
share count over the trailing 12 months.
It was -5.1%. This company is eviscerating
their share count. So the reason that Booking
Holdings holds up so well is the incredible finances behind the
company. It's simply so profitable that
it can face a lot of uncertainty and still flourish.
Now when we look at the biggest things to watch for this
quarter, we have the number one, which I agree right here that it
sustained growth in room nights and gross bookings.
If we look again at insights, we have this metric in a KPI.
It is right here the gross booking metric and you can see
this grow over time since 2020. We want to see if this trend
continues or if it finally decides to pull back.
There's a lot of reports that you've probably seen that the
travel industry is completely dead because of the tariffs and
the uncertainty. While there may be some truth to
that, there's probably some data to say that things have slowed
down. Just keep in mind that this
company has survived and expanded and grown and become
more profitable and bigger during pandemics, wars, and
financial crisis. It's done it through the Great
Recession. It's done it through the COVID
pandemic. It's done it through multiple
wars in foreign countries. Travel is inherent to human
nature. People want to travel when GDP
per capita grows, when people have more money, they want to go
out and have experiences, they want to leave the home.
And this is like an investment that captures that demand in an
incredibly profitable way. So despite the near term
concerns, I remain very bullish on this company.
It may not be this quarter, but I believe this one's going
higher. Now, moving down the week.
We get to Wednesday and this is where it really begins.
So far we've been talking about important companies, but not big
Tech. We get to Wednesday and this is
the start of Big Tech. Specifically after close, we
have Microsoft Meta. We'll start off here with
Microsoft. We know the company is the
poster child for the perfect fundamentals.
They rarely ever miss on their earnings per share and their
revenue. I think that'll be fine, but
there's bigger concerns for the Microsoft shareholder,
specifically the AI outlook. This is what everyone's going to
be digging into. Microsoft reported AI revenue
above expectations, citing a $13 billion annualized revenue run
rate for its AI businesses. Investors should closely track
the company's ability to continually scaling AI
infrastructure and monitor any future impacts from ongoing
capacity constraints. As management highlighted, the
demand remains ahead of current supply, but investments are
ramping up to address this. We have heard this time, time
again, that demand is outstripping supply with
artificial intelligence. Microsoft is one of the
companies that said this, but then they also said some things
that contradicted it a bit, saying that they're going to be
very measured with their CapEx investment.
I believe the AI growth with Microsoft is going to continue
at a very fast pace, but I do think we'll see some
deceleration. It'll likely be 100% year over
year, down from 175. Next we get to Microsoft cloud
revenue. It's surpassed 40 billion for
the first time with Azure and other cloud services showing
strong 31% growth, including a significant contribution from AI
services. So in the Azure and other
services, we had 31% growth and that should continue at a very
brisk pace. In fact, there are some
estimates that it may even increase, which would be
incredible to see from this company.
So this is going to be another big focus.
Microsoft needs to hit their cloud numbers.
If they show any weakness here, that's going to hit the stock.
If they project out in the future any weakness, that's also
going to hit the stock. This company should show
continued strong growth on the AI.
Cloud investors should watch for capital spending levels, the
pace at which new capacity comes online, and the impacts of these
investments on margin profiles and free cash flow, especially
as Microsoft transitions to higher margin AI and cloud
services. Again, overall, we've seen this
talk of artificial intelligence for the past couple of years.
It's finally implemented. We should now start to see
higher margins, higher efficiency.
If we don't end up seeing that at some point or another,
investors are going to wonder, is artificial intelligence
really boosting profits? Is it really increasing margins?
Investors really want to see evidence of that.
Now. Microsoft is very likely to post
strong earnings with growth in cloud, artificial intelligence
increases. And if they do happen to paint a
positive picture of the future with optimism about consumer
spending and resilience and AI, cloud growth, I believe it will
send the markets higher. Not just Microsoft, but the
entire S&P 500. This is one of the kings of the
market. It's one of the leaders of the
S&P 500. Other companies and investors
look to Microsoft to see which direction this market should
trade. If they are optimistic about the
future. If they post that they see a lot
of resilience and opportunity for growth and higher profits
ahead, then the S&P 500 could go higher, making a full recovery.
The S&P 500 trades off of big tech.
It doesn't trade off of car companies and other companies
hit by tariffs, low margin companies.
It trades based on these incredible, magnificent 7
companies. They are the market leaders and
I believe there's a strong potential here for Microsoft to
lead them higher. Google tried, but Google is
overshadowed by the threat of Chachi BT Microsoft doesn't have
any type of disruptive threat to their story.
This company could post equally strong results, and without that
overshadowing and concern of disruptive risk, it could send
the markets higher. So overall, I'm very optimistic
about Microsoft going into this week and I believe it could have
big consequences on the entire S&P 500.
The next company that we look at is Meta.
This is another one that I believe will have strong
results, but a lot of this strong result that we're going
to see with Meta has been priced in due to Google.
This happened after Google reported earnings, tipping
investors off that the advertising market remains very
strong. Meta actually went up more than
Google again because Meta has a very similar thesis as Google,
but less of an overall disruptive overshadowing of
Chachi BT. This stock's already up around
$70.00 from the low when I look at Meta.
Overall, this is a company that's done incredibly well and
I don't have any big reason to believe it can't go higher.
When we look at the valuation of Meta, it trades at a 22 Ford PE
ratio, a 4% free cash flow yield.
This is an attractive valuation despite its growth, despite the
share price increase, it's growing revenue continually
above 20%. So it's in the elite category of
revenue growth. So long as they maintain this,
they will be undervalued and the stock will continue higher.
And I believe that's what you're going to see this quarter.
Now moving on further down the week, we get to Thursday where
we get the other two big tech companies.
We have Amazon and Apple both reporting earnings after market
close on Thursday. We'll kick things off with
Amazon. Now this is a company.
Before we go into anything to watch for this quarter, I just
want to highlight my investment in this company.
If we look at the story fund, this is where I hold Amazon.
This portfolio is doing great. When I look at the year to date
performance, just this year, it's down 1%, widely
outperforming the QQQ, outperforming the S&P 500.
And that is after this portfolio has has beat out the S&P 500 and
the QQQ by a huge extent. So it's not only doing well
during bull years and bull markets, it's also holding up
really well during this downturn, specifically because
of Netflix. For example, if I just look at
the year to date again right now, you can see that Netflix is
really holding this entire portfolio up.
It's the reason that it's not deeply in the red this year.
It's counterbalancing all the other companies going down.
So if these companies start to perform, if they start to go up
as well, if Amazon especially, which is my next biggest
position by far, starts to perform, the outperformance will
be incredible. The performance of this
portfolio will just be epic. If we look at the performance of
the Story Fund against the S&P 500 as of today, it's already
crushing it. It's up 93% to the S&P 500, up
37%. So we've over doubled the
performance so far. And you can imagine what this
would look like if Amazon went up to $200 per share.
If Amazon went up to two 2240, the outperformance would be
incredible. The S&P 500 would rise as well,
but not to the same extent as My Portfolio because I have a much
greater level of exposure specifically to Amazon.
So what I'm looking for for this company is the $200 mark, the
220 mark, the 240 mark. I believe the fair value of
Amazon is so disconnected from where the company trades today
that my fair value for this company is around 260.
A lot of people look at that and think that's crazy, but that's
how I view the company. It's trading nearly $80.00 under
value by my estimation. Amazon is a collection of
incredibly high quality businesses, the first one of
which is AWS. The previous quarter highlighted
continued strong growth in AWS, including 19% year over year
revenue growth and a $115 billion annualized run rate.
However, management indicated that further acceleration is
being tempered by supply constraints.
Where did we hear that news? We heard it from Microsoft.
They said the exact same thing. Number one on the list was that
the AI developments and the growth of their cloud was being
constrained, they say now, particularly in chips, power and
select components. These are all from NVIDIA.
Andy Jassi has gone on to interviews saying that this is
all too expensive and prices will come down.
They're creating a lot of this stuff themselves.
Investors should monitor whether or not the supply chain
constraints begin to ease in the current quarter, enabling AWS to
capture additional demand, and how ongoing AI infrastructure
investments translates into realized revenue and margins.
Now there's two different groups of investors here.
There's ones that have avoided Amazon because they believe all
this investment in CapEx spend is not going to have a high
return. I've piled into Amazon because
I'm under the belief that this will have high returns, and I
want to see that start over this year.
So I'll be paying attention to the profitability, the margins
of this investment. When we look further at the
CapEx investment, this is a huge part of the story for Amazon.
Amazon achieved record operating income in the previous quarter
with notable year over year margin expansion in both North
America to 8% and international to 3%, supported by efficiency
gains and cost reduction initiatives.
However, significant capital investments, especially to
support AWS AI initiatives, are expected to be maintained or
grow, and management noted operating margins will likely be
impacted in the near term. Observing how operating margins
evolve in light of ongoing CapEx, which is indicated to
remain at high levels dominated by tech infrastructure, will
provide insight into Amazon's profitability resilience.
Another storyline with Amazon that I love about this company,
the reason that I put $100,000 into it is partly because of the
robotics. When investors talk about
robotics and investing in robotics, they're typically
referring to Tesla, and I believe that's more of a
branding type of thing. Investors have been sold this
narrative that Tesla is the leading robotics company, and I
don't believe that's correct. Amazon has far more robots
working in factories and completing tasks than Tesla, and
these robots are replacing human jobs.
Amazon has continued reducing its global cost to serve on a
per unit basis for the second consecutive year and is
accelerating the deployment of robotics and automation across
its fulfillment network. The current quarter will show
whether these logistics innovations are beginning to
make a material impact on the cost structure and fulfillment
scalability, potentially driving further margin gains.
I don't think this is just potential, I think this is
incredibly likely. Amazon has already proven with
real warehouses working today with real robots in them that
they can automate and Dr. efficiency.
Scaling that across all the various warehouses they have
across the country will take time, but as they do, they'll
Dr. margins higher and higher. This is another huge story for
Amazon. The retail business is looked at
as this very low quality, low margin business.
But when you layer robots on top of it, when you get rid of the
need for all that human capital, where humans need health
insurance, they can get injured, they have high hourly wages, and
they're working these jobs and warehouses that are potentially
dangerous, The robots can have a major impact here.
I can literally think of no other company in the world that
has more room to benefit from robots and automation than
Amazon. They're the biggest by revenue,
they're the biggest company in the world.
They sell the most stuff, they have the biggest amount of
customers. The automation and any margin
gains in this company are substantial.
When you look at a company that has the amount of revenue that
Amazon has, the slightest increase in margins on the
retail side means massive profits.
People have no clue how it translates into profits.
I'll give you just one example of how this type of margin
expansion effects companies with this broad of revenue.
You can take a look at Costco. If Costco is just to hike prices
by 3% across the board, if they just increased everything
they're selling by 3%, which is very difficult to notice for
most people, a 3% price hike. But assuming Costco did that,
their profits would increase by 70%.
That's how much just a slight increase in a broad based
revenue increases profits. So when we talk about
efficiencies, any slight marginal improvement in their
retail business has enormous profit potential.
And this is something that's incredibly difficult for
analysts to analyze. They simply have a hard time
baking this into their models. So Amazon has a real potential
here to outperform analyst expectations by a huge extent.
The robotics part of the company should help out with the first
party sales and the third party sales, which make up over half
of Amazon's total revenue. But then we get to the higher
margin portions of revenue. Third party sales is is fairly
high margin, but the highest margin are the advertising
subscriptions and AWS advertising.
I've highlighted as one of the best businesses in the world.
Amazon's advertising in their direct click for sponsored links
is really difficult to compete with and investors are expecting
continued growth and even acceleration in the advertising.
Advertising in the last quarter grew by 18% year over year to
17.3 billion, making it a major profit Center for both North
America and international segments.
With new features such as an enhanced full funnel,
advertising options and improvements to attribution
modeling, investors should be attentive to whether Amazon
sustains or accelerates its advertising growth trajectory,
which directly boosts segment profitability and the company's
overall margin mix. So as advertising takes market
share, so to speak, from the other segments of Amazon, that's
a good thing. We don't want advertising to
lose market share from the rest of the company.
And then finally, one thing that could hamper profitability is
the impact of foreign exchange. FX headwinds were significant in
the prior quarter, with revenue negatively impacted by $900
million and future quarters guided with an anticipated $2.1
billion FX drag. So if the dollar continues to go
up, that hurts Amazon with this foreign exchange.
But the dollar has gone down a little bit.
I haven't modelled out how that's going to impact the
company in terms of FX exchange. It's not something I model into
The intrinsic value. Something that Amazon has more
direct control over is the useful life accounting changes.
This is basically where they amortize the life of a GPU or a
server. They say that we get most of the
value in the first year, but the life goes down over five years.
It's very similar to what Netflix does with their content.
Netflix says that we have this content, we capitalize it, so
it's something that's an asset, but the value of the content
goes down over time as people consume it.
So they have an amortization schedule for a new show that it
drops off after the first year, becomes less valuable every
additional year to about four years.
That's what Amazon is doing, but with their servers instead of
content. They have the same type of
accounting care. So we'll get to see commentary
on what they do with that, whether they keep it the same or
they extend the life or reduce it.
Qualitatively, everything looks good for Amazon going into this
quarter. But the big elephant in the room
is the tariffs. Amazon is at the dead center of
the tariff battle. They're the company that really
has the most customers, that does the most business with
China, which is at the center of this tariff war.
So Amazon is going to have a lot of questions on the earnings
call about the tariffs. And I believe it will be very
similar answers to what we heard already from Andy Jassy, that is
that he believes it's going to harm consumers.
He said directly that most of the sellers on Amazon will pass
along the huge majority, if not all the cost onto the customer.
That's going to be the response to it because the sellers on
Amazon don't have a lot of margins to work with.
They're already a low margin business, so they can't absorb
the impact of 100% price increases on an input cost.
They're going to pass that price increase on to the consumer.
Part of being an Amazon investor today means that you're ready to
weather through this storm. We're going into some uncharted
territory here with the tariffs. But if you believe in the vision
of Amazon long term, all the good things happening with their
retail business, with artificial intelligence, with AWS, with the
robotics and margin expansion, if you can look ahead past the
near term uncertainty, I believe this still remains one of the
most attractive investments in the market.
So despite some near term uncertainty, I remain fully
invested and very bullish on this company.
Now finally this week, we get to Apple reporting earnings at the
same time as Amazon. This company typically beats on
their revenue and their earnings expectations and I think they
will again this quarter. Apple has been releasing Apple
Intelligence slower than expected.
They say initially investors should track the continued
global roll out of user adoption of Apple Intelligence features
as initial markets with these capabilities saw stronger iPhone
16 sales compared to those without.
The upcoming expansion to additional languages and markets
in April is expected to further drive both device upgrades and
user engagement. So the storyline, the thesis for
Apple was there's going to be this super cycle of device
upgrade. Everyone's going to upgrade to
the new 16 iPhones because of Apple intelligence.
And so far that thesis has played out a little bit.
Apple has said on the calls that in the markets they have Apple
intelligence, they've done better, but we want to see that
expand globally. They've been really slow in
expanding Apple Intelligence. It's been one of the rare cases
where Apple has over promised to feature Apple service business
achieved an all time record 26.3 billion in revenue, up 14% year
over year. Continued growth and paid
subscriptions and high gross margins now at 75% for services
are critical to watch particularly as services become
increasingly accretive to the overall company profitability.
Apple services are set to grow and I believe they'll continue
to because so far they haven't been forced to lower the price
of their take rate. They're still taking 15 to 30%.
That's a huge portion of all these different companies doing
business on the Apple App Store. So this company is still a toll
booth taking a large cut of all these transactions taking place
across this busy Rd. I sold my Apple steak early this
year out of the fear that the company was trading at a
relatively high valuation and it was not growing fast.
In fact, when we look at Apple today, it trades at a 28 Ford PE
and it trades at this premium PE ratio.
While the revenue growth has remained roughly the same for
the past couple of years. Right now, even though the
company should post great earnings, I don't believe it's
an attractive investment overall.
This week, we'll determine whether or not we have the
market make a full recovery. If these companies, specifically
Visa, MasterCard, and the four big tech companies, Microsoft,
Meta, Apple, and Amazon, all post positive earnings with
positive future outlook, even in the face of uncertainty and
tariffs, we could see the market market make a full recovery.
Because these companies have such power and influence over
the S&P 500. If they alone signal to the
market that earnings remain strong, that profit outlooks are
still growing, the market will have no choice but to go further
higher. That's going to be it for this
episode. Hope you enjoyed.
See you in the next one.