AMZN 4Q2019 Update - AWS and Alexa Innovation Continues

AMZN 4Q2019 Results show revenue growth of 22% across the business with AWS growth at 35%. AMZN total revenue for 2019 was $285B with AWS at $35B revenue and 4Q2019 revenue of $10B with 26% operating margin implies $50+B expected revenue for 2020 and $12.5B profit in AWS. 

AWS and Alexa Innovation Continues with AWS Outpost allowing Private and Hybrid Clouds and AWS Local allowing low latency and increasing usage possibilities. Amazon Prime has a good year consolidating #2 position behind NFLX in video streaming. Alexa continues to expand its presence. AMZN now has 150M+ prime subscriptions. Retail business continues to advance with help from one day shopping. 

Challenges for AMZN including regulation and specifics challenges in India due to high competition. Political Risk in US and India also exist due to Jeff Bezos also owning a Washington Post. 

Valuing AMZN is a very tough job as there are many moving parts. On a long term basis AWS could be valued at 7-11 times Annual Revenue considering the growth potential and lead in innovation. This would imply $280B to $440B for AWS alone. Alexa, Echo, Fire TV, Ring Doorbell and other AI aspects could be valued between $50B to $100B on a long term basis. AMZN Logistics which is becoming a major competitor of FDX and UPS could be valued between $50B to $100B on the long term basis if logistics services can be provided for 3rd parties. Prime Video and AMZN Fashion etc are added value.  So a case can be made that 65% of $925B AMZN valuation (at $1835 decent price) is accounted for by these non retail businesses. Retail business could still grow long term and could be valued at $300 to $500B. 10 years ago many of these added businesses did not exist so who knows what AMZN would consist of in another 10 years if innovation continues. 

AMZN 4Q2019 Earnings Release

FB 4Q2019 Update - Reasonable Valuation for High Growth Business

FB Reported 4Q2019 Results with revenue growing 27% year over year and expenses growing 51%. The operating profit margin for the company has reduced from 50% to 37% over the past 2 years as company has to spend more on security and data protection.

Regulation is a major concern as it will slow down the growth potential of the company. Growth has slowed from 30% to 25% and future growth over next 5 years could be 18-20% per year. This and profit taking after large run up in 2019 explains the reasons for recent correction. 

This company has done an amazing job over last 5 years increasing revenue from $12.5B to $70B. Share price has also increased. Company has $57B excess cash which is $19 per share. At $202 share price today an investor is paying $183 for a business that can earn $10 Cash EPS in 2020. 18 times P/E for a business that still has monetization potential with Instagram and WhatsApp and has a dominant advertising franchise with Facebook is a very reasonable price for a long term investor. Company continues to invest in innovation in AI, Payments, VR and other avenues. 

Assuming company can grow revenue at 18-20% over next 5 years and earnings 15-20% as well at a 15 P/E the stock could be valued at $300 to $350. Not as fantastic an opportunity as in Dec 2018 but in the current expensive market FB is relatively speaking a better value. Selling Jan 2022 $200 Puts for $40+ can assure a $160 effective price providing a greater margin of safety and higher return. 

Major competitors are GOOGL, TWTR, SNAP, AMZN. 

FB 4Q2019 Earnings Release

Top 4 US Tech Companies Now Worth $4.7T

Top 4 US Tech Companies Now Worth $4.7T.

AAPL, MSFT, GOOGL, AMZN form the top 4. FB is also currently valued at $500B and could hit $1T if it continues to innovate and grow over next 5 years. 

AAPL Rally Based on Massive P/E Expansion

AAPL Rally Of more than 100% return over last year has entirely been Based on Massive P/E Expansion.

AAPL trades over last 5 years with average P/E of 15 which was less than tech peers which had faster growth. Last Jan AAPL P/E slumped to 12 well below S&P 500 P/E of 18. Today AAPL trades at trailing P/E of 27+. 

Unless AAPL grows its earnings at a fast clip and delivers on innovation and transition to services based business investors buying recently at highs will see underwhelming returns.

Vulture Investors Swoop In On China Bad Loans

Vulture Investors including BX and OAK Swoop In On China Bad Loans. As of 2020 Jan China and India are the two regions of the world going to economic slowdown and banking distress. 2.5T Yuan worth of loans out of $6T Yuan are non performing loans as of now. 

WSJ - Vulture Investors Swoop In On China Bad Loans

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Europe Cheap Debt Draws Borrowing from US Companies

Europe Cheap Debt Draws Borrowing from US Companies as the Euro Corporate Bind Rate is 0.8% compared to 3% for US Bonds for Investment Grade companies. 2019 saw Euro 100B worth of bond issuances by US companies the highest of last decade up from Euro 10B in 2010. 

For strong companies it is the best time to be borrowing in Europe. 

WSJ - Europe Cheap Debt Draws Borrowing from US Companies

India’s Ghost Towns Saddle Middle Class With Debt and Broken Dreams

India now has 500K Unfinished apartments that are in financial limbo as many builders have collapsed. Most of these are in Delhi, Mumbai and Bangalore. 

Now there are Rs 5.2 Trillion worth of borrowing on property projects up from Rs 1.3 Trillion in 2010. This equates to $73B worth of loans. Sophisticated investors like Brookfield, KKR, Apollo and Blackstone would likely benefit over next few years as these loans are unwinded. Brookfield has been lending money to builders over last 3 years at 10% interest rates and looks like their plan has to been to position themselves for bankruptcy and takeover of some of the projects if they failed. 

WSJ - India’s Ghost Towns Saddle Middle Class With Debt

Alphabet Hits $1T Market Cap First Time

Alphabet (GOOGL) Hits $1T Market Cap First Time after stock topped $1450. Excluding $150 excess cash per share GOOGL which could earn $60 Cash EPS for 2020 is close to 22 times Forward Earnings with chances for long growth runway. Compared to AAPP at 25+ times Forward Earnings and 10 year US Bond yield of 1.77% GOOGL is relatively better valued. FB at $222 which is also at 20 times Forward Earnings excluding excess cash and has faster growth potential compares well and is attractive to GOOGL today. 

Investors who purchased shares of GOOGL in last dip to $1020 in Jun 2019 or $970 in Dec 2018 due to recession fears and regulatory fears currently are up 45% on their shares and with $60 Cash EPS for 2020 their Adjusted Earnings Yield excluding $150 cash per share would be > 6%+ based on a 15 times earnings multiple. For a company that can grow revenue and earnings at 18-22% for next few years and has optionality with other bets including Cloud Business, Self Driving Tech etc this is a great proposition.   

Alphabet Hits $1T Market Cap First Time

WeWork Leasing Plunged 93% in 4Q2019

WeWork leasing was a disaster in 4Q2019 after IPO failure and SoftBank rescue. CompNy only leased 184K SFT in 4 leases in 4Q2019 compared to leasing 2.5M SFT in 4Q2018. 

Spaces brand of Regus (IWG) took over too Appt among flexible space leasing with 285K SFT lease. The hole looks too deep to climb out of for SoftBank and it may likely need to write down all of its investment over next 3-5 years. IPO investors dodged a bulletin on this one as company was initially looking to sell shares at valuation of $24B to $48B. 

WeWork (WE) Leasing Plunged 93% in 4Q2019

Tim Cook has had a stellar run at AAPL - Stock UP 480% since Cook took over in August 2011

Tim Cook has had a stellar run at AAPL -  Stock UP 480% since Cook took over in August 2011. Even though iPhone and Apple Watch were conceived under Steve Jobs the strong market position and incremental improvements have been good enough to take in the money.

Tim Cook does deserve credit for sensible capital allocation with doing share buybacks at reasonable prices, giving a growing dividend and for avoiding wasteful acquisitions. He also deserves credit for managing to avoid issues related to US China Trade War and for maintaining a working relationship with Trump which avoided negative outcomes for the company and its shareholders.

Tim Cook Stellar Run at Apple 

US-China Phase 1 Trade Deal Summary

Trump and his trade negotiations team have done a fantastic job of bringing China to the table for US-China Phase 1 Trade Deal the Summary of which is as below. This will be a positive for the US and North American economy as manufacturing will benefit. 

Companies like BA, CAT, DE could benefit. 

Miller Value Partners - 4Q2019 Snapshot

Miller Value Partners - 4Q2019 Snapshot

Boeing Deliveries to China

Boeing (BA) Deliveries to China are a significant area of growth and US-China Trade War resolution will have a major impact on how much business Boeing does in the near term. In the longer term things will depend on how COMAC the Chinese Plane maker is able to evolve its product line. 

Around year 2000 BA was delivering 25-30 planes to Chinese customers per year which grew to 150-200 planes over 2015-2018 years. 2019 saw only 45 deliveries impacted by 737 MAX issues and Trade War. 

Big Tech Dominates S&P 500 - 18% Weight

Big Tech is leading the world in innovation, productivity and these are likely the champions for shareholder returns over the next decades. 

• The recent Big Tech surge is good news for anyone chasing the sector higher, but several strategists highlight it's a sign investors have lost their risk appetite.

• The top five publicly-traded American companies - Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (GOOG, GOOGL), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) - now make up a record 18% share of the S&P 500 Index's capitalization.

• That ratio is higher than the tech bubble, according to Morgan Stanley, amid fears the economic cycle will slow.

Big Tech 5 companies market caps as of 14 Jan 2020 are as below:

1) AAPL - $1.4T

2) MSFT - $1.25T

3) GOOGL - $1T

4) AMZN - $940B

5) FB - $634B

SIX Flags (SiX) - Investment Opportunity to Watch

SIX Flags (SiX) - Investment Opportunity to Watch.

SIX stock is down to $35 from $65 due to China woes and a bad 4Q2019. The company may have an unsustainable dividend payout in near term due to softer results and company also has $3.75B debt. 

It is a company to watch to sell puts or buy calls on further correction into the 20’s.

S&P 500 Total Return by Decade History

As we start a new decade what can we expect the total return for next decade to be in S&P 500. S&P 500 Total Return by Decade History Shows that Growth Rate and Multiple Expansion/Contraction Change will be decisive factors.

Unless we are going to see a major recession which delevers from the excesses is the low interest rate world we will likely seen 3-5% earnings growth related return. Depending on how interest rates move we could remain with no change or a change in either direction. 

My sense is that in most scenarios we can expect 5-9% total return per year over the best decade in S&P 500. 

Bear Market S&P 500 P/E Contraction History

Bear Market S&P 500 P/E Contraction History Shows that there was. 35% contraction of P/E from 19 to 11.5 in modern times. Who knows what the case will be in next recession ams who knows when the recession will occur.

These words “This time could be different” are dangerous but I dare to speak them as low interest rate world due to government intervention may be a factor. If 10 year Govt  Bonds only Yield 0> to 2% it seems unlikely they S&P 500 P/E would be 11 implying 9% Earnings Yield which be 7% earnings yield spread over Govt Bonds. 

Usually when stocks have had a beat market bonds have some well. However due to abnormally low interest rates in next recession cycle this factor may only produce moderate returns. 

Brookfield to Consolidate TERP into BEP

TerraForm Power (NASDAQ:TERP) +8.3% pre-market after saying it received an unsolicited proposal from Brookfield Renewable Partners (NYSE:BEP) to buy all outstanding shares it does not already own; BEP already holds a ~62% stake in TERP.

• BEP is offering consideration equivalent to 0.36 of a unit for each TERP share, which would value TERP at $17.31/share, an 11% premium to TERP's closing price on Jan. 10.

• TERP says it has formed a special committee to evaluate the proposal.

BEP is trading at a High valuation. It will be a good idea to consolidate TERP and BEP for BAM. Lot more analysts follow TERP so hopefully there will be more coverage for BEP going forward. 

Brookfield and Singapore’s Temasek Make Joint Bid for Thyssenkrupp Elevator Unit - $16.5B

Brookfield (BAM) and Singapore’s Temasek Make Joint Bid for Thyssenkrupp Elevator Unit - $16.5B. Otis of United Technologies (UTX) is #1 in the market and it is an Oligopoly with 67% market share from top players including Otis (US based) Kone Oyj (Finland based) Schindler (Switzerland based) and Thyssenkrupp (Germany based) and Hitachi (Japan based). Market share by revenue is 12% Otis, 11% Schindler, 10% Kone Oyj, 9% Thyssenkrupp AG, 7% Hitachi. 

Thyssenkrupp is a conglomerate and its elevator business is neglected and has lower profit margins of 10% compared to 15% by Otis. With German 10 year bond rates available at 1% Brookfield can make a bid and leveraged returns can be good if they can improve the business. 

Elevator companies have long term service contracts and they make 50% of the money through services. Asia which has 50%+ of world population is the fastest growing market with India and China having major growth opportunities. 

We should know the outcome of the sale process within a month or so. 

Brookfield Temasek Team Up for Thssenkrupp Elevator Unit

WSJ Going Up? Elevator Service Business

Elevator Market Analysis

Elevator Market 2019-2024 Trends

Boeing vs Airbus - Order Backlog 2019 End

Boeing (BA) vs Airbus (EADSY, AIR.PA) orders for 2019 indicate a clear win for Airbus as Boeing struggles with 737 MAX Issues and the Reputational Damage. 

BA has orders this year of 243 aircraft for $6.6B while Airbus had 940 orders this year worth $18.6B. 

On October 31, 2019, Airbus’ backlog was 7,471 jets. Of these, 6,543 (88%) were A220 and A320ceo/neo Family narrowbodies. The company set its all-time backlog record high of 7,577 jets in December 2018.

On October 31, 2019, Boeing’s backlog (total unfilled orders before ASC 606 adjustment) was 5,675 aircraft. Of these, 4,573 (81%) were 737 NG/MAX narrowbody jets. Boeing set its all-time backlog high of 5,964 aircraft in August 2018.

The number of Airbus aircraft to be built and delivered represents nine point three years of shipments at the 2018 production level. In comparison, Boeing’s backlog would last “only” seven years.

Secular Tailwind In Aviation - Growth Runway for Boeing & Airbus

There is a major Secular Tailwind In Aviation and  Growth Runway exists for Boeing & Airbus. BRICS accounts for 40% of world population and 20% of GDP and number of people entering middle class in India and China will soar in the next 2 decades. Also spending on travel is excoriates time grow significantly over next 2 decades.

There may be recessions and downturns in the interim but over next decades if Boeing and Airbus maintain safety standards and can retain the duopoly there is a tremendous amount of money to be made.