Two Seattle companies — Amazon and Microsoft (I have no financial interest in their securities) — are vying for the position as the world’s most valuable company.
In the meantime, who will win the quarterly battle of beating and raising — that determines how their stock prices will trade in the next few days — will be settled later today.
Microsoft shares are down nearly 2% in pre-market trading after it reported slightly disappointing revenues. Meanwhile Amazon is expected to post 19% revenue and 51% earnings per share growth later today — its shares trade up 1.8% in pre-market.
I think Amazon shares will take a hit after it reports this afternoon.
Before getting into that, let’s review Microsoft’s report and preview Amazon’s.
Microsoft’s Slight Miss
Microsoft reported 12% revenue growth to $32.47 billion — $40 million below the number expected by analysts, according to Refinitiv — but EPS of $1.10 was a penny more than expected.
Microsoft’s Azure cloud business grew 76% — the same rate as it did the previous quarter.
But Microsoft did not report Azure revenues — instead they’re bundled into its Commercial Cloud category (Azure public cloud, commercial subscriptions to the Office 365 productivity software bundle, the Enterprise Mobility and Security products and commercial LinkedIn services) — whose revenues were up 48% to $9 billion, according to CNBC.
Microsoft’s top business segment, More Personal Computing — which includes gaming, search advertising, Surface and Windows — reported $12.99 billion in revenue — $81 million short of the number expected by analysts. As CNBC wrote, “revenue from Windows device makers fell five percent year over year in the worst results there in more than two years.”
CFO Amy Hood issued disappointing guidance for the current quarter ranging between $29.4 billion and $30.1 billion in revenue — the midpoint of which is just below the Refinitiv consensus estimate of $29.87 billion.
Hood expects Microsoft to suffer “continued market impact” because of a more limited supply of chips, and she said the PC conditions could also hinder Office consumer revenue growth.
Amazon Earnings Preview
Amazon is expected to report rising revenue and profit. Specifically, analysts expect Amazon to report 19% revenues growth to $71.89 billion and 51% EPS growth to $5.65, according to FactSet.
The Wall Street Journal expects Amazon to report a record holiday for online sales — having benefited from “thousands of closed Toys “R” Us stores last year.”
Amazon may also report better than expected advertising revenue. Despite a third place position in digital advertising behind Google and Facebook, Amazon’s “‘other’ revenue category, primarily comprised of ads, has been growing quickly and is higher margin than many of its other businesses,” according to the Journal.
Meanwhile, Amazon leads the $180 billion market for cloud infrastructure, which lets companies offload their computing and data storage.
Synergy Research Group reported that in the third quarter of 2018, AWS — with 40% public cloud market share — “remained the clear leader in all four of the world’s major regions, ranked by public IaaS and PaaS service revenues. Microsoft was ranked second in three of the four regions.”
AWS is expected to report revenue of $7.3 billion, according to analysts surveyed by FactSet, up 43% from the $5.1 billion AWS reported last year.
Amazon is competing by launching new services — such as its AWS RoboMaker that was adopted by companies like Stanley Black & Decker, Robot Care System, Open Robotics and FIRST, opening more datacenters globally and lowering prices, according to Zacks.
Sadly for Amazon investors, SunTrust Robinson Humphrey analysts found that e-commerce giant usually does not beat and raise when reporting its holiday quarter results.
As MarketWatch reported, those analysts wrote, “History shows that Amazon has had limited success in exceeding Street expectations for revenue in 4Q, likely due to the lack of visibility at the time guidance is given, and difficulties in forecasting a high amount of sales volume in such a small window.”
In the last 10 fourth quarters, Amazon has only exceeded analysts’ expectations in 2017 and 2009 — it failed to beat in all the other previous ones, according to SunTrust.
Meanwhile, Amazon’s stock market capitalization is up 11% this month to $817 billion. This ties Microsoft’s market cap — which has inched up 3% this month.
If history is any guide, Amazon will miss analysts’ expectations for the quarter and its shares will be worth less than Microsoft’s by the end of the day.
Over the long run, though, I think Amazon will be more successful than Microsoft at tapping into big new growth markets — as long as Jeff Bezos remains CEO and he’s not too distracted by negotiating a divorce settlement with his wife, MacKenzie.
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