Amazon: free cash, amazing AWS...but you have to get the top-slicer out for the shares

I noted back in April that Amazon shares were 'still all about the cash flow' (link here).  Therefore pretty impressive that even after 'finance lease principal repayments and capital acquired under capital leases' free cash flow was positive.  Less restrictive measures showed a positive US$3bn+ quarterly generation which if you extrapolate it is kicking around a 5% free cash flow yield.

Of course such latter statistics can easily be critiqued...hence my use of the above chart.  Still, at least cash flow however measured is going in the right direction...a bit like the Amazon share price which broke US$600 (although closed just below that level) on Friday after Thursday's after hours results.  

So a warmly received set of numbers...and the reason (again) was centred on Amazon Web Services which might only be 7% of sales...

...but showed further progression in its operating results...

...to account for just over half overall company operating profits: 

It also helps to have a cloud based client list that includes such luminaries like General Electric, BMW and Netflix.  

So what price AWS?  Back in April I opined about a US$20bn+ valuation but today this would put the stocks on x10 extrapolated operating income - not high enough.  I would say US$40-50bn of value today (although I have seen numbers as high as...US$110bn as analysts muse on charts like the one below as well as highly exciting write-ups from the recent AWS re:Invent conference which noted a sharp increase in audience and new technology which further augmented their competitive position. 

And this is the trouble of course with Amazon valuation: the numbers can go crazy very easily.  For example I was quite taken with this analysis: 

'AMZN's Prime ecosystem is gaining traction with some estimated 60-80m users globally, and the higher purchase frequency as well as larger order size from the Prime users will likely to be supportive of AMZN's Q4 numbers during the holiday season. If the recent increase in hiring part-time workers is any indication, AMZN is preparing for another blockbuster quarter. By 2020, I would not be surprised to see Prime penetration reach 50% of US households, which is roughly 60m'

Never bet against Amazon and their ability to enter new sectors/retail market places and ultimately dominate them as these revenue numbers show...

...and of course there remains plenty of other markets Amazon have not attacked yet.  

Earlier today I wrote up the recent Alphabet/Google numbers and concluded that for the first time since I had been invested in the company it was time for a top-slice.  Of course its headline actual earnings numbers are somewhat higher in absolute terms than an Amazon (or Facebook or Netflix).  

(chart sourced here)

In the US$300s and US$400s it was easy for me to be well-disposed towards Amazon.  In the US$500s (unpublished here on Financial Orbit) I became much more neutral/top-slice oriented and at/around US$600 a share I think you should take some money off the table in the stock. In fact proportionately I would take a lot more off the table than I suggested in Alphabet/Google earlier. 

For the first time I am selling some Google (Alphabet) stock

Do I hear US$500 a share?  How about US$600?  Still interested?  Well how about US$700 every Alphabet (aka Google) share?  In fact to be precise, as per the Friday close for the 'GOOG' ticket unit, US$702 a share.

It has been a great run for Alphabet/Google shareholders over the last year.  I have liked the stock for the totality of 2015 (and before) but the pushing through the US$700 share price level even makes me wonder.

So what should you do with Alphabet shares above a US$700 share price?

First, let's look at the Q3 numbers and try and work out why the market marked up the stock so aggressively after the close Thursday.

Headline revenue growth was nothing special...although FX influences (as with for so many companies) were a negative.  Still headline 13% year-on-year was not too shabby...

...and non-GAAP income was up 15% to a new quarterly record.  Not exactly bad metrics for a near US$500bn market cap company.  

As regular readers will know I tend to look at the combination / gap between the 'paid clicks' and the 'cost-per-click' to give some real underlying insight.

So how did the numbers look this time?

Q314 17% (paid clicks) -2% (cost-per-click) = 15%
Q414 14% -3% = 11%
Q115 13% -7% = 6%
Q215 18% -11% = 7%
Q315 23% -11% = 13%

The best quarter of the last four!  Again not too shabby for a company with a near half a billion dollar market cap. On the conference call management attributed much of this improvement down to YouTube.

And how about cash flows which I have waxed lyrical about at both of the links above?  Well, US$3.6bn is good although not as strong as the previous two quarters.  Nevertheless the cumulative last four quarter free cash flow equates to just over US$14.6bn or 3% of the current market cap.  Not shabby...but a combination of a slight fade in the quarter-on-quarter free cash with the aforementioned rise in the company's market cap has meant those previous hopes of getting near the fabled 5% free cash flow yield have been dashed.  Blame the clear return to a double digit growth potential...(a growth level which really should not be anywhere near a 5% free cash flow yield of course).

But Alphabet/Google were not finished there.  As Fast FT noted:

'Alphabet, the new holding company for Google, has announced the group's first stock buyback - and got clever with it.

In a play on its new corporate name, the company announced that it's stock buy-back would amount to $5,099,019,513.59 - or the square root of 26, the number of letters in the alphabet.

The numerical gimmick echoed a stock offering it mounted a year after its IPO a decade ago, when it sold 14.159m shares, using the numerals after the decimal point in pi'. 

Given the company currently has approximately US$60bn of net cash and is generating cash as per the above this clearly is easily funded, sensible and a shareholder friendly approach - and surely only the start at little more than 1% of market cap.  As I noted in July:

'...with the new CFO mentioning twice the notion of ‘maximising stakeholder value’ on the conference call I strongly reiterate my earlier call on the paying of a dividend or buying back stock (and maybe both). Yesterday’s coy comment of it being ‘premature…to gauge how capital return fits in’ is unlikely to be repeated beyond the end of this year'

What else did management say/do?

Well, 'new Google CEO Sundar Pichai states Google has indexed over 100B deep links within 3rd-party apps, as it tries to head off the threat posed by mobile users bypassing search in favor of going directly to apps. 40% of mobile searches now have in-app results within their top 5 results. Pichai reiterates mobile now accounts for over 50% of searches. He also notes over 20M Chromecast devices have been sold to date'. 

I also note positive conference calls comments like:

Users: Products like Search, Android, Maps, Chrome and YouTube each have over a billion users already, and Google Play crossed that milestone this quarter as well

Android opportunities: Especially, there are whole new markets opening up, there’s next billion users coming online in emerging markets. And businesses, I mean, Enterprises, a whole opportunity for OEMs as well. So I think there is a lot of room ahead.

Digital shift: top 100 advertisers spend was up 60% year-on-year on YouTube

So not much to dislike in the Alphabet conference call and lots of residual growth scope...but what about valuation today?

Extrapolating the non-GAAP operating income puts the stock on around a prospective x17 EV/ebit multiple which is high but not totally unworkable.  Of course these are the non-GAAP numbers...run similar analysis on a GAAP basis and it throws out nearer a x19 multiple.  Still growth is better and they are starting to return cash...and then there is the dynamic aspects of creating Alphabet.  

You can go around this valuation debate forever.  My summary view is to take a few profits north of US$700.  Alphabet sits in the middle of so much but the scope for a share price appreciation pause as seen in 2014 is high.  And that smells like a big top-slice opportunity for me. 

For the first time I am going to sell some Google stock from my pension fund. 

ASML: ' shipment expectations have changed...due to customer uncertainty'

It has been a couple of years since I last wrote formally about ASML the Dutch listed company with a dominant share in lithography systems for semiconductor companies. The way to think about it is that they enable chipsets to get smaller which still is a very clear trend. The key is always technology and two years ago I used this excellent chart to highlight this...

Today's update from the company feels to me like a classic short-term versus long-term.  Longer-term the company is still very comfortable with multi-year targets like Euro10bn worth of revenues by 2020 (implied CAGR c. 8%+).  But, as the outlook chart in their presentation noted, corporate life is not the easiest as the moment reflecting corporate capex uncertainty:

'Foundries are slightly more cautious with their investment plans' is important for the company given the split of the backlog as noted below: 

In addition the aforementioned great white technological hope EUV is not ramping quite as fast as expected:

EUV: 'shipment expectations have changed...4 from 7...due to customer uncertainty'.  But hopeful of the future given public comments by customers but timing has been pushed out. 'EUV a question of when not if' 

And in terms of the other demand relevant comments from the call here a few highlights:

Memory 'customers indicating that system demand will continue at healthy levels'

NAND - 'limited lithography shipments...sales could be down year-on-year'

Logic - 'more cautious stance' re capex

'10nm ramp is very real...but will not start before Q2 (2016)...will provides customers with very attractive nodes...but (application) is not as simple as customers thought'

So what to make of all this?  Clearly capex is currently lumpy - no huge surprises given some volatility in chip industry corporate profitability.  Numbers-wise however the last rolling twelve months has generated over Euro1.5bn in operating income and over Euro1bn in free cash.

Too much to extrapolate such numbers?  In a fast-moving area there is going to be high variability but maybe not.  Nevertheless at a c. Euro31bn EV it still implies a x20+ EV/ebit and 3%+ free cash flow yield (although the company has continued to distribute proportionately more than this).

So overall thoughts: interesting company, fascinating technology and a clear market leader.  I like the debt-free balance sheet and willingness to return capital but any trade here is either responding to high market volatility (note the transitory fall to c. Euro70 in the volatility of the last couple of months) or longer-term.  We are at neither at the moment but I have put a flag at Euro70. 

Blackberry - not compelling for me

The last time I wrote about Blackberry (link here) I concluded that:

'I remain on the sidelines with no position'

Today's Q1 numbers from the company have some good and bad points with the better points centred on continued growth of the software business and free cash generation...and the negatives being the continued non-GAAP operating losses:

Such differentials were also apparent in the notes I made from the conference call as reproduced below: 

Positive cash flow 6^th quarter in succession

Positive ebitda 7^th quarter in succession

Software ‘continues to expand’.  4^th consecutive quarter of double-digit revenue growth

‘not satisfied…especially about our handset business’

Confirming Android phone launch called 'Priv' with enhanced security capabilities: ‘working with a lot of people including Google’

‘(Priv news) leaked so thought best to let everyone know’

Want to grow devices profitably, grow software

M&A important

‘differentiating on security’

On 'Good' acquisition just completed believe combined best in EEM space

Think cash flow and earnings accretive in first year

Buyback goes from 6m shares to 21m shares

upping buyback by additional ~2.9% of the company

"Sorry, BB10 fans. It sounds like BlackBerry's CEO is setting the groundwork up to scrap its own OS. $BBRY"

US$2.07bn net cash

‘Q2 numbers lower than I expected’

The last few months above act as a pretty good super summary.  Still got a lot of net cash (EV around US$1.6bn using the above) BUT ex the last gasp Android launch Blackberry remains prospectively all about software potential and (interestingly undiscussed on the conference call) patent book monetisation hopes.  Net net however progress remains pretty shabby.  

Still at the above EV suggestion given the share's dire performance (wonderfully shown versus Apple in the chart below - h/t @natebecker) the shares trade at less than x3 EV/ebitda for the above call options. 

This is the right way to think about the company: a call option.  I am not in a huge rush to invest but the main theme of the above is that I doubt if Blackberry will be an independent company in a year or so's time.  As with Nokia that implies there probably is a trade here...but it is not a hugely compelling one to me I must admit - especially as there are lots of other interesting companies to invest in out there.  

Transcripts...Alibaba talks

Conference season always throws up some interesting thoughts especially given the more volatile market backdrop plus the reality that most companies are about five-sixths of the way through their Q3 numbers which they will report on during October-November.

So interesting times.  Alibaba has been in the news a lot recently...mostly involving that highly excitable Barron's article which basically suggested the stock was still heavily overvalued.

Did this article help form some kind of low?  I did after all (link here) talk about the company post their mid-August disclosures with the share in the lower US$70s as being of great interest...

Helpful then to read this transcript from yesterday's Deutsche technology and related conference. Here are my personal key highlights (with all augmentations such as underlinings mine): 

On Chinese (e-commerce) spending: 

From the micro standpoint, what we – we see that fundamentally, there is still very robust retail e-commerce activity. So, for example, in the areas of our spending like people buying refrigerators, buying white-goods, shopping for furniture, if they want to upgrade into a new apartment, home furnishing, those categories are staying very strong, because these are – this is spending that people have to spend

by large, our belief is that, the Chinese consumer is fundamentally very, very strong

Funding the Chinese consumption switch: 

In the past five or six years, you see both urban and also migrant worker wages have been going up over 10% year-on-year, coupled with a very high savings rate what’s going on is historically there’s been a lot of accumulation of wealth, and in particular cash, in people’s bank account. So when we look at the cash level, net cash level, that is the total deposit in the system, in the banking system, minus household debt, the net cash is $4.4 trillion.

The growth of mobile...and payments: 

the dynamics of mobile versus PC is that, the activity has shifted to mobile in a much faster way than we anticipated

If you don’t have a payment app that you can readily use, it’s very, very difficult to capture the economics from the transaction.

we’re seeing really our ability to create marketplaces that have a lot of commercial value and monetization against that is only in the early inning. And that overtime – there is a lot of economic activity on our platform that we can monetize again

The Barron's article: 

The only thing I want to mention here is that the article was trying to serve information that’s incorrect. For example, they got the total US online advert spend in e-commerce wrong, that’s just the wrong number. So, if you corrected that number, it completely undermines their argument.

Horribly out-of-favour - as are most things Chinese as shown by the year-to-date Shanghai bourse performance which is now down: 

(h/t @Callum_Thomas)

As per my mid-August write-up linked above I personally see an interesting mixture of structural growth, low sentiment and cash flow.  Clearly there are some risks...but there are opportunities too.  I am interested in adding to my position.  

A few thoughts and readacrosses from Asian corporate results #1

With an overload of China/Asia macroeconomic insights, how about some read across from Asian companies?

Cathay Pacific - this one caught my eye as a year ago I noted:

'...the stock trades sub book (x0.95)...A year ago I concluded that a Cathay Pacific share price sub book was an opportunity in times of strife and looking at the one year chart above that is below HK$14.  As with many airlines volatility is your friend / nudge to buy the shares'

And look where we are now...back in the US$14s.  Interesting - it sees to like an August 'run' down to this level based on the last 3 years or so.  

Of course the recent H1 numbers were better although the inevitable lower fuel costs were slightly counterbalanced by higher staff, landing and depreciation costs (as well as fuel hedging costs).  Still a good advance year-on-year as reported. 

No problems with passenger load...

...but cargo loads perhaps show the inevitable correlation with Asian/global trade and business realities.  Clearly this is the big fear underlying the stock at the moment.  

My view on the stock is that to buy it below book (< HK$14) remains a level of interest especially with the current high baked in negative sentiment. 

China Mobile 

Been a while since I have looked at this one but the shares in China's inaugural mobile company (as with China Unicom and China Telecom majority owned by the Chinese government making an investment inevitably deeply political).  

However the results did say something to me - and that is not that operating profit slightly surprised to the upside...but that mobile data traffic growth was so strong: 

And why is this?  Well as with any telecoms company at the moment this is centred on the growth of 4G...

...and that makes me think about mobile data company again.  Nokia due to their ongoing merger with Alcatel Lucent and the resulting self-help has been my favourite...and the stock is back around 1 year lows again:

That's interesting. 

Finally the Macau casino company Galaxy Entertainment unsurprisingly had a poor set of numbers (augmented apparently by some bad luck on the tables!)...

...although they continue to build their Macau portfolio (and so weaken their balance sheet).

The shares are trading near a 3 year low and a low/mid teens EV/ebitda rating - not classically cheap. However this is a macro sentiment play - just think what the rating change would be if earnings just went back to their 2013-14 trajectory...  My view on Galaxy: am watching with interest but no position at the moment.

A second part with thoughts on some financial and logistical companies will follow later.  

Sina, Weibo and a Chinese sum-of-the-parts

I last had a go at the Sina/Weibo sum-of-the-parts analysis in a two part analysis here and here concluding back then that:

'...essentially all the value in Sina was derived from its holding in the micro-blogger (aka "Twitter-esque") Weibo...(but) Weibo may be closer to its lows than its highs but I am leaving it to the experts. Good luck to all shareholders'

Since then both shares participated in the Q2 Chinese shares rally...and the subsequent Q3 bust.  On a six month odd view they are little changed.

First the Sina numbers. A few things strike me:

'Net income attributable to SINA for the second quarter of 2015 was $11.7 million, compared to $16.6 million for the same period last year. 

Non-GAAP net income attributable to SINA for the second quarter of 2015 was $4.0 million, compared to $12.1 million for the same period last year. 

Online advertising revenues for the second quarter of 2015 were $176.3 million, compared to $155.8 million for the same period last year. The year-over-year growth in online advertising revenues resulted from an increase of $28.3 million in Weibo advertising and marketing revenues, offset by a decline of $7.9 million in portal advertising revenues'

Yes, once again the only part of the business of Sina really worth worrying about is Weibo.  

To update the numbers from earlier in the year:

At Weibo's current market cap, Sina's 54% stake is worth US$1.66bn   US$1.26bn

And their own market cap?  US$2.2bn currently or an EV (after adjusting for net cash held) of...just under US$900m.  US$1.03bn

Hmm!

Of course it is not that easy.  There is a US$800m convertible bond so I think a fairer adjusted EV is about US$1.15bn or basically close to the value of the Weibo stake.

Whilst there are some positives including a share repurchase scheme  (US$300m out of US$500m authorised having been undertaken), it is still all about Weibo.  

And what about one of China's Twitter equivalents?  The qualitative comments sounded quite good: 

'Our Weibo platform continued to make strong progress in growing our user community with 212 million people accessing Weibo each month and 93 million people using Weibo every day.

On the monetization front, our Weibo's financial performance grew nicely with the solid execution on the operational side. Total revenues for Weibo grew by 39% for the second quarter and year-over-year basis, driven by growth in advertising business. Advertising revenues grew by 47% in the second quarter on yearly comparison, driven by increased spendings in promoted feeds and on mobile terminals. Mobile advertising revenues accounted for 62% of total revenues in Q2, up from 58% in the first quarter of 2015 and 39% in the second quarter of last year'.

The trouble still comes with the underlying lack of proper, real ebitda as shown by the observations: 

'Net income attributable to Weibo's ordinary shareholders was $4.2 million, or $0.02 diluted net income per share, compared to a net loss of $15.5 million for the same period last year, or diluted net loss per share of $0.08.

Non-GAAP net income attributable to Weibo's ordinary shareholders was $10.9 million, or non-GAAP diluted net income per share of $0.05, compared to a non-GAAP net loss of $5.1 million for the same period last year, or non-GAAP diluted net loss per share of $0.03.

Non-GAAP adjusted EBITDA was $15.4 million, compared to a non-GAAP adjusted EBITDA of negative $1.8 million for the same period last year'.

Yes there is some progress but even if you looked at the non-GAAP adjusted ebitda line (so many qualifications to this!) is this really worth US$2.3bn?

As I noted back in May: 'one for the experts' (especially as I can buy stocks like Alibaba with real cash flows etc. - link here). 

Lenovo - an out-of-favour HK listed consumer play

I have written about Lenovo before most recently noting back in May that:

'I note the technical support/resistance at HK$12/share.  That is the 'flag' level for me.  Still a fascinating theme stock (China, technological devices) with strong historic execution and new opportunities/acquisitions to bed down but too rich a share price for me today'

Fortunately many stocks 'flagged' in the Chinese and Hong Kong stock markets over the last few months with the volatility in the local indices.  A HK$12 share price may have flagged in June but today that same share is worth less than HK$8 a share.

So why this sharp move?  Well no huge surprises that the global PC market has been shabby and worse than hopes...

...but amazing to see the sequential change in the smartphone market too. Put these two together and that is not the easiest combination especially with the all-important Chinese market being so weak in the smartphone space.

 And in terms of where the losses were made mobile did show up...

...no surprises that this was away from Asia, in particularly the Americas due partially to the slow transition of the acquired Motorola business and also some particularly poor operating conditions in Brazil.  Given all the above, in hindsight not a great time to acquire more international smartphone interests.


With even profitability fading in their core Chinese heartland Lenovo appear to be doing more than just waiting for the acquired Motorola and server assets to become either fully integrated or bring out new products to be put through the Lenovo distribution mechanisms.  I liked the sound (from a purely investing perspective) of the cost cuts being employed...

...as well as the other initiatives being employed to drive growth.  Frankly given Lenovo's culture and range of products you would back them beyond many others in the smartphones/PC marketplace.

With the faded profitability and now a little debt after the corporate acquisitions the shorter-term valuation rating is a little high.  However the near 3.5% dividend yield is one signal investors can grab hold of.  

So it feels horrible...but my instinct is that this one to keep on thinking very seriously about.  Perhaps not in the first tier of preferred Hong Kong listed stocks (like for example AIA or Samsonite) but certainly a second tier consumer/technology play.  

Alibaba - China crisis but flaunt the cash flow

My last write-up on Alibaba concluded that:

'My view would be that building this sort of a client base predominately in the world's fastest growing large economy is clearly structurally very interesting.  Just under 40% ebitda growth for a just over x40 earnings rating...peg ratio advocates could certainly make that work.  

So not a stock for everyone maybe but I can still make it work and want to add further over time/on weakness. The US$80 level the share bounced from today is one such level, US$70 (or 5% free cash flow yield using the FY15A free cash generation) is another.  

Alibaba: i like the structural growth and cash flow and the management evolution announced today also sounds sensible. I am looking for opportunities to augment my holding'. 

So what has happened over the last three months?  Well after a push back to the US$90s the share has drifted down...and today is languishing at a new post IPO low: 

Now part of this is linked with the malaise surrounding the Chinese market and more recently the Chinese economy.  Indeed the correlation between Alibaba and the last 3 month move of the Shanghai Composite is quite striking: 

In terms of the results growth may not have hit everybody's hopes but just under 30% revenue growth is not too shabby although margin falls ("Consolidation of acquired businesses...Investment in new business initiatives") did constraint year-on-year ebitda growth to 'just' 23%. 

The growth of mobile as hinted to in some of the statistics above but the improving monetisation (a theme I noted on the most recent superlative Google results earlier in the results season - link here) continued apace.  Note importantly that now a majority of the Chinese Commerce Retail Revenue is now generated by mobile.  

Of course - again thematically playing out in the aforementioned Google results - is the importance of a rise in free cash flow.  This necessarily is a bit lumpy but getting on for RMB10bn given all the ongoing investment/expansion by the company struck me as reasonable.  With traditionally the better cash flow quarters to come it is not implausible that the company will generate nicely above a 4% free cash flow yield.  The US$70/share and 5% free cash flow level I noted last quarter may be a slightly tough stretch however.  Nevertheless accretion should be anticipated from the newly announced 2%+ of market cap equivalent buyback.

Other noteworthy aspects were the nice quantification of the strategic investment portfolio worth a cool 18% equivalent of today's market cap...

...and more tactically negatively the reality of the end of the lock-up of a mere 1.5bn+ of shares.  Does anyone dare sell?

Putting it all together the current Chinese sentiment malaise and lower margins took the edge of otherwise strong results (mobile monetisation, portfolio interests, cash flow).  However - as I concluded in May - the current share price in the lower US$70s interests me.  The company may not be quite generating the fabled 5% free cash flow yield at this level but (especially adjusting for portfolio interests and obviously expansionary capex) it is close enough.  

In short, on a day of considerable China related fear, it is more a day to be buying Alibaba shares.  My view is that I doubt whether many of the locked up shares will be sold - and any Yahoo shareholder dumping overhang may provide another opportunity to augment.  

One final point, as noted by Fast FT, Alibaba's great peer Tencent also reported today.  It would be remiss to ignore their thoughts too.  An update report on them will be published later.