silicon valley stories: How Big Tech Makes Money

Thursday, October 29, 2020

Cost of sale : 40 bn
Operating expense : 10 bn
Operating Income : 14.7 bn
Net Profit : 12.7 bn
Cash in hand ~50 bn
Commentary : Overall revenue and profit is constant from 2018 and 2019. However, stock price has gone up as the company has reduced the number of outstanding stocks through buy backs. However, PE has gone up from 12 to 35 and future growth seems to be priced in, until Apple opens up new revenue streams. Apple shared no revenue guidance for Q4

Net sales : 96 bn
Operating Income : 6.1 bn
Net income : 6.3 bn
All the above figures are higher than Q4 2019
Investing in Amazon provides significant international exposure : NA 62%, International 26% and AWS 12% of net sales. YoY net sales grew by 39%, 37%, 29% across those 3 categories
Online stores 48 bn, Physical stores (includes whole foods) 3.7 bn, Third party seller services 20 bn, subscription services 6.5 bn, AWS 11.6 bn, Ads 5.3 bn
Online stores grew at 37%, physical stores at -10%, third party seller services at 53%, subscription services at 32%, AWS at 29% and ads at 49% YoY
Commentary

Physical stores slowdown is expected due to Covid, but all other categories grew faster than AWS. Net sales increased 37% YoY. With Covid-19 expediting Amazonification of the world, this will be an unprecedented holiday season. Amazon expecting 112bn in net sales in Q4.
Some of the demand from COVID like grocery, gloves may not recurring next year. But COVID is increasing engagement, retention of the Prime membership program and usage is growing across different categories
Prime videos is a very good acquisition channel for Prime members - > higher membership renewal rates and higher engagement
International has been profitable for 2 quarters now

substantial growth in direct response
brand advertising (create brand and interest)
YTs strong watch time growth enables advertisers to reach people who they cant reach on TV

Data processing, analytics, AI/ML
Migration of legacy datacenters to google cloud and cut in IT spending and infrastructure. eg : Nokia migrating 30 data centers to the cloud across 12 countries
Google meet saw a peak of 7.5 billion daily video call minutes
Six priority industries : healthcare, retail, media, finance, manufacturing, public sector
5 major geographies
4 customer segments

Net income - 11 bn (operating margin 24%)
Losses on other bets : 1 bn, nicely masks the operating margin from 27% to 24%
Cash on hand : 133 bn
International exposure : US 21.4 bn, EMEA 13.6 bn, APAC 8.4 bn, Other americas 2.6 bn
Google has greater than 50% ex-US revenue exposure
PE (1.1 tn / 50 bn) ~ 22. Alphabet looks cheap going forward given it is growing revenue at double digits compared to the rest of big tech.
Youtube music has 30 mn paying customers and Youtube TV has 3 mn paying customers
In Q4, 2020 GCP will be its own reporting segment
Commerce

Revenue : 21.4 bn (22% growth)
Operating income : 8 bn (operating margin 37%)
Cash on hand : 55 bn
200 mn businesses, 10 mn active advertisers, 40 mn people viewing a business catalog every month, more businesses are doing things online due to COVID
Earnings call transcript

Big Tech companies are generating revenue worldwide. All of them have considerable international revenue exposure.
Amazon (37%), Facebook (22%), Google (14%), Apple (~flat) - revenue growth
Facebook (37%), Google (24%), Microsoft (37%) - operating margin
265 bn in revenue, net profit of 52 bn, operating margin of ~20%, market cap ~7.5 tn
Cloud is an extraordinary secular trend and all cloud players are gaining from IT spending and cost cutting
Digital advertising continues to be a secular trend - TV dollars, CPG marketing budgets, retail goods moving online all driving this trend, organic small businesses trying to reach customers online

silicon valley stories