Good morning! Today’s word count is 2,137 words, or an 11-minute read. Let’s get to it:
Market Summary (10:39 A.M. ET): “Major indexes wobbled, pressured by a string of mixed earnings reports from companies ranging from airlines to banks,” WSJ writes.
- S&P 500: $3,525.34 (-0.25%)
- Nasdaq: $11,859.76 (-0.15%)
- Bitcoin: $11,345.21 (+2.60%)
- Gold: $1,900.90 (-1.45%)
- U.S. 10-Year: 0.733%
Justin Oh’s Quick Read
Let’s revisit why Amazon ($AMZN) is still my favorite capital compounder for the long haul by far… at least for those of us without access to certain Chinese tech giants.
Amazon has been on a tear, growing sales an average of 26% each year on massive profits. Covid-19 has only accelerated sales growth and dominance in e-commerce, only at the expense of extra safety spend in fulfillment centers. Analyst consensus estimates estimate $AMZN’s growth to be 31% this year and taper off into the mid-teens growth rates after that. I believe that there’s not only upside to these projections in 2020 but also beyond. Short of government antitrust restrictions, I don’t see Amazon’s growth halving in 2021.
People still fail to give Amazon credit for its multi-layered and non-linear growth. Of course, they will continue to grow their Amazon Prime subscribers count, which grew from 100 million in 2018 to 150 million in January 2020 and non-subscribers buying goods. But Amazon Prime members also increase their purchases on Amazon’s platform in a huge way, with much larger spending per household than non-members. Furthermore, Amazon is making inroads into the home (Alexa, Echo, Fire TV) to increase spend per household, including much more profitable digital movies and goods.
Ignore Amazon’s profits for now, since it’s clear it reinvests almost all the money it makes. I believe Bezos’ ultimate goal is to build out an online marketplace and physical distribution network through which (all?) e-commerce purchases go through, both digital and physical. Once Amazon can achieve this, it can extract a toll on all consumer spending.
On top of all that, we get to own the most-dominant cloud business out there – Amazon Web Services (AWS), a very high-profit margin business growing at over 30%. It’s as much of a cloud computing play as a consumer spend one.
And we get to own all of this for a reasonable 25x forward EBITDA and 9.5x forward Gross Profit? Even if I buy slightly too high or low at any given time, I know how great this business is and won’t bat an eye if the market tanks 15%+. When Amazon stock dips 15%, I get excited for my own little Amazon Prime Day; I get one of the best assets in the world on sale. Amazon will eat the e-commerce world, and I want to be along for the ride in a big way. The only thing we need to keep an eye on is potential government restrictions or a breakup.
Huge Expectations Follow Amazon Prime Day
Despite a three-month delay, Amazon Prime Day is here, and it could be a record-setting event for the e-commerce giant, Fortune reports.
eMarketer projects Amazon’s global sales will reach nearly $10 billion over the next two days, with $6 billion coming in the U.S. alone.
- That would mark a 43% increase over 2019’s Prime Day.
- JPMorgan estimated $7.5 billion in U.S. Prime Day revenue for Amazon.
Amazon came up with Prime Day to “drum up sales” in July, a generally quiet time of the year for shopping. Thanks to Covid-19 delays, the two-day sales event is now kicking off this year’s holiday shopping season roughly three weeks before it usually gets underway.
The retail industry follows Amazon at this point. As soon as Prime Day was announced in September, Walmart, Target, Best Buy and a bevy of other retailers followed suit with their own “counterprogramming.”
- This year’s e-commerce rush could be more important than ever. Deloitte forecasted roughly 1.5% growth in retail spending, but another research firm projected in-store Black Friday shopper traffic to fall 25% due to Covid-19 infection risk.
Amazon’s “peak season” starts earlier and runs longer this year and the company added thousands of employees to keep up with demand, according to CNBC.com.
- Amazon has hired 175,000 warehouse and delivery workers during the pandemic, retaining 70% of them. It also opened more than 150 last-mile delivery stations since March, speeding up delivery.
- Walmart added 20,000 seasonal employees to the 500,000 it hired since March, while Target projects to bring in roughly 130,000 seasonal workers for the holiday season.
In their July last analyst call, Amazon CFO Brian Olsavsky stated that skipping Prime Day significantly impacted Amazon’s growth in the third quarter, possibly bringing the growth rate down 30% for the quarter. No wonder they brought back Prime Day for the fourth quarter. A late Prime Day does not materially change my view on Amazon stock long term.
For your reference, here is some interesting information on Amazon ($AMZN) from the first half of 2020:
- Revenues are split: 61.8% North America sales, 25.4% International sales, 12.8% Amazon Web Services (“AWS”)
- North America sales have 3.4% profit margins, international sales are breakeven, and AWS has 30.6% profit margins
- As such, AWS represents 65.4% of all Amazon’s operating profit
- Capital expenditures have doubled this year because they are reinvesting in additional capacity in fulfillment in the continued business growth in AWS
Johnson & Johnson Pauses Covid-19 Vaccine Trials Due to Sick Subject
Johnson & Johnson has paused Phase 3 trials of its experimental Covid-19 vaccine after a study participant had an unexplained illness, WSJ reports.
For hopes of a vaccine sooner rather than later, it’s a tough blow as J&J had one of the most advanced candidates in development. The company was in the middle of a late-stage trial with a goal of enrolling as many as 60,000 people across the U.S. and other countries.
- J&J previously anticipated preliminary findings as late as early next year, with emergency use approval potentially in early 2021.
- Vaccines from AstraZeneca, Moderna and Pfizer also entered late-stage testing.
J&J’s vaccine engineers an immune response using a weakened version of the common cold. The shot delivers genetic instructions teaching the body’s cells how to make a specific protein to fight back against Covid-19 if a person is exposed.
Side-effects and illnesses are expected in any clinical study, but guidelines exist to regulate any severe or unexplainable outcomes.
- J&J’s plan stipulates that if a subject has a “serious adverse event that is determined to be related to the vaccine” or if “someone has a severe allergic reaction, known as anaphylaxis, or hives, that can’t be attributed to something other than the vaccine,” the trial goes on pause.
- AstraZeneca also had to pause trials after a participant in its U.K. vaccine study reportedly experienced a spinal-cord problem. It has since resumed in the U.K., but not in the U.S.
Now, it’s up to an independent safety board to review the subject’s illness, figure out if the incident was related to the vaccine, and determine if it’s safe to proceed.
Although this news might bring short-term choppiness to the stock, remember from our previous analysis that Johnson & Johnson ($JNJ) has many products and is a much bigger company than the addressable market for the COVID-19 cure. Even if a Covid-19 vaccine is priced into $JNJ stock, I estimate that it’s only a true 6-8% swing in its intrinsic value today.
$JNJ trades at 13.0x forward EBITDA and a 5.4% free cash flow yield and is expected to grow an average of 4.8% into the future. $JNJ spits out 2.6% of its value in dividends per year and is one of the safest dividend stocks you can buy if you’re looking for retirement or supplementary income.
Number Crunch: Citibank Profits Slide, While JPMorgan Posts A Small Uptick
“Citigroup said Tuesday that its third-quarter profit slumped 34% and the bank set aside billions of dollars to cover potential losses in the coronavirus recession,” WSJ writes.
- The global bank recorded a $3.23 billion profit, a significant decline from $4.91 billion a year ago. Total revenue decreased 7% to $17.3 billion from $18.57 billion.
- Citigroup’s tough Q3 still outperformed its Q2. After putting aside more than $7 billion in loan-loss provisions in the past two quarters, Citigroup added another $2.26 billion to the reserve fund.
- Things have been a little shaky at Citigroup. Last month, CEO Michael Corbat announced he would retire in February and hand over his position to bank president Jane Fraser, and regulators fined the global bank $400 million for risk management deficiencies.
“JPMorgan Chase & Co. said Tuesday that its third-quarter profit rose 4%, a surprising result for the nation’s biggest bank during a recession that has hammered much of its business for the year,” WSJ writes.
- The bank posted a profit of $9.44 billion, rising from $9.08 billion a year earlier. Total revenue dropped to $29.15 billion from $29.29 billion a year earlier.
- JPMorgan put aside $10.47 billion for future losses in Q2 but only added $611 million to that total in Q3. The smaller reserve could indicate the bank thinks it’s prepared for any future losses. JPMorgan CEO James Dimon said the bank could dip into another $20 billion in reserves if disaster strikes.
- Dimon also pointed to the positive results being temporary, as U.S. consumers need more government assistance. “A good, well-designed stimulus package will simply increase the chance we get better outcomes, but there is so much uncertainty we’re not saying that that’s definitive,” Dimon said.
We are in a complicated interest rate environment, with the looming specter of insufficient fiscal stimulus that might eat into personal savings accounts as well as financial technology (“FinTech”) disruption. If the economy opens up and recovers quickly, the labor market snaps back, and rates are allowed to ease, bank stocks look like they could be a great play. But with so much uncertainty around interest rates, savings, and FinTech disruption, I remain on the sidelines on bank stocks for now.
What’s Going On
Follow The Leader: “Walt Disney Co. announced a major reorganization meant to give priority to its streaming-video services and ensure they get a steady flow of the company’s best content, in a shift echoing similar moves by other entertainment giants…The new alignment pushes Disney’s streaming platforms, including Disney+ and Hulu, even closer to the center of the company. The various programming arms, including movie and television studios, will be aiming to feed those streaming services, not just legacy outlets.”
Dire Straights: “Illustrating how dire the situation is for the movie theater industry, the world’s largest theater chain could run out of money by the end of the year. AMC Theatres said Tuesday that its existing cash resources would be “largely depleted” by the end of 2020 or early 2021 because of the ‘reduced movie slate for the fourth quarter,’ as well as ‘the absence of significant increases in attendance from current levels.’ The company said it has two ways out of its cash crisis: Either more customers need to buy tickets, or it will have to find new ways to borrow money.”
Raising Roundup: Kahoot landed $215 million for its e-learning platform, fraud prevention service FingerprintJS nabbed $4 million, security startup Cyberpion pulled in $8.25 million, Qatalog collected $15 million for its SaaS “virtual workplace,” Malaysian on-demand work platform GoGet netted $2 million and South Asian-focused media company The Juggernaut raised $2 million.
Chromed Out: “Justice Department and state prosecutors investigating Google for alleged antitrust violations are considering whether to force the company to sell its dominant Chrome browser and parts of its lucrative advertising business.”
Gamer Frenzy: “Online game development service Roblox announced Monday that it has confidentially filed to go public, as demand for video games has risen throughout the pandemic.”
Surging Shift: “Shopify Inc.’s recent expansion into physical distribution is looking prescient, as surging digital sales during the coronavirus pandemic boost demand for the e-commerce technology company’s fulfillment services.”
Laptop Launch: “A surge in remote work, study and home entertainment during the coronavirus pandemic boosted personal computer sales in the third quarter and drove the strongest growth in a decade in the U.S.”
Bolstered Boost: “China’s car market recorded its first quarter of year-over-year sales growth in two years as a broad economic recovery bolstered consumer confidence and discounts boosted demand, especially for electric vehicles.”
Clean Energy: “The world’s transition to cleaner sources of energy is gaining speed as the coronavirus pandemic accelerates a shift in investment away from fossil fuels, according to the International Energy Agency.”
Blank Check: “SoftBank Group Corp.’s Vision Fund will outline plans for a blank-check company in the next two weeks, seeking to capitalize on the investor frenzy surrounding the unusual fundraising vehicle.”
Keep Inflating: “The [CPI-W Index, a measure of inflation,] for the third quarter of this year was 1.3% higher than the same period last year, translating to a cost-of-living adjustment by that amount.”