Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Earnings Watch: Can Uber stop the bleeding; Amazon spending pays off
Peter Garnry
Chief Investment Strategist
Summary: The earnings season continues at full speed with more earnings from outside US being released. Among US technology companies the two most anticipated earnings are from Alphabet and Uber. We take a look at Uber's outlook and their need to soon show a path to profitability. Amazon reported earnings last night with shares up 10% as earnings smashed expectations and guidance was strong.
The earnings season continues with on balance good numbers and the outlook remains cautiously optimistic. As we wrote yesterday’s equity update earnings are looking good in the US and Europe, so the Q4 earnings season is a positive for supporting current equity levels.
Next week 343 companies out of the around 2,000 companies we track during earnings season will report earnings. The 30 largest companies reporting are listed below.
Mon: Google
Tue: BP, Gilead Sciences, Sony, Mitsubishi UFJ Financial, Walt Disney, Fiserv, Chubb, ConocoPhillips
Wed: Novo Nordisk, Siemens, BNP Paribas, GlaxoSmithKline, Qualcomm, Merck, Vinci
Thu: Total, Uber Technologies, Toyota, NTT, Estee Lauder, Philip Morris, S&P Global, T-Mobile, L’Oreal, Bristol-Myers Squibb, Sanofi, Becton Dickinson, Cigna
Fri: AbbVie
Uber needs to deliver to avoid negative spiral
Uber reports earnings on Thursday and the risks are high for the on-demand transportation company which is expected to have had a negative $4bn free cash flow in 2019. Revenue growth is expected to decline to 15% from 42% in 2018 showing the intense competition globally for Uber but also market saturation in key cities and maybe also that the hype is done. Uber is still struggling with negative margins and a bumpy road to profitability.
Financial Times broke the story yesterday that Softbank had pushed Uber and DoorDash to consider merging their food delivery businesses in order to get scale and become profitability. The talks have not materialized in a merger but it underscores the increasing demand from investors for these new technology platform companies to show a path to profitability. Shares are down 19% from the IPO price last year but were down as much as 42% at the lows in November. Much is at stake for Uber next week. We remain skeptical that the business is viable, but luckily for Uber the Fed’s monetary policy will keep rates low for longer which makes it easier for the company to refinance and convince equity investors to finance the company if needed.
Amazon spending spree pays off
Shares have been more or less flat for almost two years and investors were worried about Amazon’s spending spree, increased competition in cloud infrastructure, integration of Whole Foods acquisition and weak international business. But Amazon delivered in Q4 with revenue reaching $87.4bn slightly beating estimates while EPS at $6.47 smashed estimates of $4.11. Shares were up 11% in extended trading to new record levels for the stock.
On the positive side Prime membership grew to 150 million, best quarterly free cash flow ever at $14.3bn, higher margins in AWS and slower growth in delivery costs. On the negative side volume in AWS was on the weak side suggest competition from especially Microsoft, which also recently won a big cloud deal with Pentagon beating Amazon, is heating up. For now margins are improving in AWS but over time these could come down as the market matures. International revenue growth at 14% was also a disappointment and shows that Amazon’s brand is not as strong in non-US markets as in its home market.
Amazon generated $21.7bn in free cash flow in 2019 which translate into around 2% free cash flow yield which is still aggressive as it’s lower than Facebook which has a much higher margin business and higher growth rates. Analysts expect Amazon to double its free cash flow to $40bn in 2021 and if that is indeed possible then with low rates on the horizon Amazon will continue to attract investors.
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