FundamentalsWritten by Ophir Gottlieb
There are two risks that exist, one which threatens Amazon's valuation, and one that threatens Facebook and Google. They're different risks -- but both are real and may be the only real solid bearish theses for these three tech marvels.
Here we go:
Let's start with Amazon. While the company crushed revenue and EPS estimates in its latest earnings release, we do note that the cloud computing arm (AWS) drove 56% of operating income. First, here is the market share visual:
CLOUD INFRASTRUCTURE MARKET
Amazon is crushing it -- even Microsoft (NSDAQ:MSFT) has yet to crack 10% penetration.
While Wall Street applauded the huge growth in that relatively small business, everybody appears to have missed one staggering reality.
Since AWS accounted for just 9% of Amazon's revenue but the lion's share of its profits it does require us to hyper focus on that business line. That focus reveals a frightening reality and here it is:
In this chart we simply put each quarter of revenue growth from AWS side-by-side with its corresponding quarter from the prior year.
Q3 growth year-over-year dipped from 16% to 14%.
Q4 growth year-over-year dipped from 21% to 15%.
Q1 growth year-over-year dipped from 10% to 7%.
No matter how you slice it, seasonality or not, AWS growth is slowing to a near standstill. Now, usually with mega cap technology we can make a reasonable argument that as numbers become so large, growth must slow, but quite frankly, the $10 billion AWS revenue in the last year is actually not that big for a mega cap. In fact, Amazon nears $130 billion in total revenue.
If AWS is the growth engine for Amazon that has turned it into a $325 billion company, then it's time to focus on the elephant in the room -- and that's rapidly declining growth.
Is Amazon a marvel? Yes. Has the excitement over its cloud business blinded some to a slowing business? Yes.
GOOGLE AND FACEBOOK
Over 95% of Facebook's revenue and about 80% of Google's revenue comes from advertising. Both companies are growing quickly. But with such a focused profit model, a new material risk has appeared and it's starting to proliferate. Look at this chart that plots the expansive growth of ad blocking software:
AD BLOCKING SOFTWARE PROLIFERATION
According to a report published by PageFair and Adobe, ad blocking software worldwide has increased 41% year-on-year to 198 million monthly active users and is expected to cost publishers more than $21.8 billion in 2015 in lost revenue (BusinessInsider).
The risk for Google may appear larger than that for Facebook since Facebook's ads appear inside the app -- a sort of closed and wholly owned ecosystem for the social media company. But take a step back -- is it really unimaginable for app developers to produce advertising blocking software to be activated inside apps? I'll answer -- no. It's not unimaginable, it might even be likely.
If we go down that rabbit hole, we see that Twitter is also at risk. The risk to Google is so large that the company has started what appears to be, maybe, just a little bit, of a hail marry solution.
GOOGLE TRIES TO FIX IT: SORT OF
Google is exploring the creation of an "acceptable ads policy." This would be an attempt to create an industry-standard for online ad formats and that format would be "illegal to block."
Several executives with knowledge of these discussions confirmed to Business Insider that Google has been looking at spearheading such a policy. Google's SVP of advertising, Sridhar Ramaswamy, said late last year:
Yes, the top advertising executive at Google used the word "survival."
We've just covered the worst of the worst for Facebook, Google and Amazon. Let's not get too carried away. But, as the market gets toppy and selling takes center stage, these risks will start to get the headlines. It's time to be prepared, even if it's for a storm of negativity that ends up being nothing more than click bait, it could cause short-term panic selling.
It's better to know before hand.
WHY THIS MATTERS
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Thanks for reading, friends.