Dif­fer­ing takes for Ap­ple and Mi­crosoft from mar­kets

The Pak Banker - - OPINION - Richard Wa­ters

IT isn't ev­ery week that two vast tech com­pa­nies such as Face­book and Mi­crosoft see a com­bined $53 bil­lion added to their stock mar­ket val­u­a­tion - par­tic­u­larly when it co­in­cides with a slide that wipes $73bn off the joint val­u­a­tion of two oth­ers, Ap­ple and Ama­zon.

Yet that is what hap­pened, as Wall Street tried to di­gest an un­usu­ally volatile earn­ings sea­son in the tech­nol­ogy sec­tor. Such large val­u­a­tion swings in tech of­ten point to shift­ing tec­tonic plates in the in­dus­try, as in­vestors move money out of ma­tur­ing tech­nol­ogy mar­kets and into newer ones with big­ger growth po­ten­tial. The vi­o­lent stock price swings of big tech showed some of those forces at work, with Wall Street warm­ing to signs that promis­ing new mar­kets in­clud­ing mo­bile ad­ver­tis­ing and cloud com­put­ing were start­ing to boom. But they also re­flected shorter-term suc­cesses or dis­ap­point­ments, as a set of com­pa­nies that are each among the 10 largest in the US by stock mar­ket value have in some cases strug­gled to live up to ex­pec­ta­tions.

As so of­ten dur­ing earn­ings sea­son, it was in­ter­net re­tailer Ama­zon that pro­vided the big­gest whiplash for tech in­vestors. The mar­ket sent Ama­zon's share price up 9 per cent on Jan­uary 28 in an­tic­i­pa­tion of strong re­sults, but the stock plunged 13 per cent in af­ter­mar­ket trad­ing when prof­its came in 35 per cent below Wall Street's ex­pec­ta­tions. Ama­zon con­ceded that dur­ing its busiest quar­ter it had mis­judged the de­mand from third-party sellers who store items in Ama­zon ware­houses and pay the re­tailer to han­dle ship­ping lo­gis­tics. "This did make our ware­houses rather full and caused us to in­cur some vari­able costs in the US," said Brian Ol­savsky, Ama­zon's chief fi­nan­cial of­fi­cer. Ful­fil­ment ex­pense rose by a third in the fourth quar­ter, con­tribut­ing to the lower-than-ex­pected prof­its.

How­ever, an­a­lysts also blamed Ama­zon's his­toric dis­re­gard for prof­its as part of the rea­son for Wall Street's dis­ap­point­ment. "This is not a man­age­ment team that lis­tens to the Street all that much, or frankly cares about what the Street thinks all that much," said Youssef Squali, an­a­lyst at Can­tor Fitzger­ald. Ama­zon's heavy in­vest­ment lev­els have his­tor­i­cally left lit­tle room for profit. The com­pany has re­ported less than $600 mil­lion in cu­mu­la­tive prof­its over the past four years, even while rev­enues have surged. It has been in­vest­ing heav­ily in new ar­eas such as pro­duc­ing films for Ama­zon Video, build­ing new data cen­tres, ex­pand­ing retail op­er­a­tions in In­dia, and grow­ing its lo­gis­tics op­er­a­tions in the US. The net ef­fect was that, even though Ama­zon's profit mar­gins rose in the lat­est quar­ter, big in­creases in head­count and in in­vest­ments lim­ited the in­crease and wor­ried in­vestors.

Yet if Ama­zon's higher spend­ing caused un­ease, its lat­est earn­ings also con­firmed that the com­pany's cloud com­put­ing arm, Ama­zon Web Ser­vices, re­mains a bright spot. As the fastest-grow­ing and high­est-mar­gin part of the com­pany, hopes for AWS had un­der­pinned a 62 per cent bounce in the com­pany's shares since last April - at least, un­til Jan­uary 28's earn­ings dis­ap­point­ment. Rev­enues from AWS grew 69 per cent in the fourth quar­ter, reach­ing $2.4 bil­lion. Even faster growth in Mi­crosoft's cloud com­put­ing busi­ness added to grow­ing Wall Street con­fi­dence that new chief ex­ec­u­tive Satya Nadella has found a for­mula that will carry the com­pany be­yond the PC era. Azure - its cloud com­put­ing plat­form that com­petes with AWS - re­ported a 140 per cent jump in rev­enues, an ac­cel­er­a­tion from the pre­ced­ing quar­ter.

In case in­vestors had missed the point, Nadella was on hand to stress the sheer size of the op­por­tu­nity ahead: "The en­ter­prise cloud mar­ket is mas­sive, much big­ger than any other mar­ket we've been in." Mi­crosoft's lat­est num­bers also helped to dis­pel some of the con­cerns that a shift from soft­ware to cloud rev­enues would weaken the com­pany's profit mar­gins. Mar­gins in its cloud busi­ness had started to rise, ac­cord­ing to chief fi­nan­cial of­fi­cer Amy Hood, as Mi­crosoft ben­e­fited from lower unit costs and suc­ceeded in mov­ing cus­tomers to higher-value ser­vices. The news was enough to add more than 4 per cent to Mi­crosoft's shares, even though its much larger PC busi­ness de­clined fur­ther in the lat­est quar­ter and its over­all rev­enues and prof­its fell.

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