Happy Sunday.
Two themes that weâre watching are whatâs leading the market and lumber as a leading indicator:
S&P 500
Through Wednesday, the year-to-date return S&P 500 (black line) was +5.13%. The top eight âFAANG + MNTâ (Facebook, Apple, Amazon, Network, Google, Microsoft, Nvidia, Tesla) contributed +5.57% to the overall +5.13% of the S&P 500.
The "other 492" contributed a -0.44% return to the S&P 500, and collectively dragged the S&P 500 lower.
Lumber
Lumber vs. Gold (above) is also a historically-consistent measure of risk-off vs. risk-on in equities. Itâs currently screaming ârisk-off.â
As we can tell from market activity throughout the last two years â thereâs no perfect indicators for whatâs to come. Weâre simply saying that we are now paying attention to lumber futures and are eager to see if the Lumber vs. Gold trend acts as reliable signal.
Week in Review â Too Long, Didnât Read:
Amazon is positioning themselves for post-recession growth, Meta is cutting costs while increasing revenue, Microsoftâs Azure might be the new kingpin, Americaâs agreement with South Korea caused negative threats, Russia & Ukraine both administer strikes, Tucker Carlson parts ways with Fox News, U.S. GDP doesnât impress, Core PCE Inflation is quite sticky, Mortgage Rates reach their highest levels since 2008, all of the Housing Data you could ever need, and the Employment Cost Index comes in above forecasts.
Key Earnings Announcements:
Amazon is positioning themselves for post-recession growth, Meta is cutting costs while increasing revenue, and Microsoftâs Azure might be the new kingpin.
Amazon (AMZN)
Key Metrics
Revenue: $127.4 billion, an increase of +9% YoY
Operating Income: $4.8 billion, an increase of +30% YoY
Profits: $3.2 billion, compared to a net loss of -$3.8 billion last year
Earnings Release Callout
âOur Stores business is continuing to improve the cost to serve in our fulfillment network⌠Our Advertising business continues to deliver robust growth, largely due to our ongoing machine learning investments⌠And, while our AWS business navigates companies spending more cautiously in this macro environment, we continue to prioritize building long-term customer relationships.â
My Takeaway
Just so weâre all on the same page, Amazon makes up a 3.4% weighting inside of my portfolio â which is about average.
Things I liked:
Amazon just proved to investors their ability to deliver above consensus profitability, even when you factor in declining advertising demand + tightening IT budgets + slower consumer spending (GMV was flat).
By focusing on their high-margin AWS, advertising and subscription business segments, Amazon was more than able to offset the recession-driven slowdowns elsewhere.
Their operating income came in at $4.8B for the quarter, much higher than Wall Streetâs $3.0B estimate â this was aided by Amazonâs highest gross profit margin of all-time during the quarter (46.8%).
Things I did not like:
AWS (their fastest-growing and most profitable business segment) is beginning to experience a material slowdown in growth. The company notes that revenue growth in Q2 is shaping up to be about -5% slower than the +16% we experienced in Q1. While I donât believe this is a âgame overâ for AWS, this might be a hint toward market saturation.
The verdict:
Iâll remain a shareholder. Thinking back to the above âthings I likedâ section â Amazon has a ton of high-margin growth levers they can lean into (once this recession subsides) that should catalyze material growth in their top and bottom lines. Iâll continue to dollar cost average into my position.
The companyâs stock price has done a wonderful job of moving in tandem with operating cash flow â Wall Street is guiding for a near +100% increase between now and the end of 2025. Iâm excited.
Meta Platforms (META)
Key Metrics
Revenue: $28.6 billion, an increase of +3% YoY
Operating Income: $7.2 billion, compared to $8.5 billion last year
Profits: $5.7 billion, compared to $7.5 billion last year
Earnings Release Callout
"We had a good quarter and our community continues to grow. Our AI work is driving good results across our apps and business. We're also becoming more efficient so we can build better products faster and put ourselves in a stronger position to deliver our long term vision."
My Takeaway
As you all might remember, I opened a position in Meta about a week or two ago â and Iâm really happy I did!
Things I liked:
Metaâs guidance for Q2 implies revenue growth above +10%, which is absolutely welcomed. Pair this with meaningful cost savings to the tune of billions and you have a recipe for success.
The company also mentioned their AI-driven recommendations are driving a +24% increase in overall Instagram engagement, with the incrementality of Reels engagement growing over time as well.
Things I didnât like:
The companyâs revenue growth was largely impacted (in a good way) by better-than-expected advertising performance. However, management noted that Chinese e-commerce advertisers starting to spend more in Q1 was what pushed them over the top. Iâm not sure how sustainable this is in the long-term.
The verdict:
I believe Meta will lean into their Reels monetization strategy, leverage AI to drive ad performance / targeting improvements, and double down on their business offerings for WhatsApp to realize steady +10% growth in revenue for the remainder of 2023 and well into 2024.
When you pair this growth with cost cutting or even muted CapEx growth, you have a recipe for serious earnings potential. Long Meta.
Microsoft (MSFT)