Amazon’s AWS keeps moving
Amazon reported strong sales for March – AWS was the obvious standout, with sales up +16% – slightly underperforming Microsoft’s cloud unit by 200 bps – margins in the lucrative AWS segment fell 21% however – increased cost of sales + more competition from Alphabet and Microsoft is certainly a factor in squeezing AWS’ once-dominant service. International sales increased +1% (+9% excl. f/x) and North American sales grew +11% – expecting modest single-digit growth going forward, we maintain that the consumer is starting to run out of spending power – that “sales growth” is mostly inflation-linked price increases. At some point the “levee’s gonna break”. Good results from Amazon’s advertising division – +21% to $9.5B (compare that to Meta and Alphabet – Amazon’s ad business, which is smaller of course, is starting to become a serious competitor in the space). What we’re seeing is Amazon essentially becoming a tech company with a consumer wing attached – the cliche goes, you buy AWS, and you get the consumer business and the ad business for free. But don’t underestimate the consumer business – all those Amazon Prime memberships are as potent as a CostCo membership – they are buying “mindshare”.
Mastercard – the consumer keeps spending (even if it’s on credit)
Strong results from Mastercard that echoed Visa’s – +15% growth in total payment volume and +12% growth in revenue – its operating margin remains an astonishing 58.2% – it’s hard to argue with results like that. Cross-border transactions increased 25% (vs. Amex’s 29% and Visa’s 24%) – we continue to say this, but travel + services are the main beneficiary of this most recent spate of consumer spending – people would rather spend on experiences than goods, and that’s reflected in the data we’re seeing – note services inflation (US vs. UK) which has remained elevated over the past year. Retaining buy on V & MA – we see owning both as owning a basket of equities which take advantage of the consumer’s continued transition to card vs. cash.
New Zealand
The New Zealand market (NZX50, -0.1%) edged lower on a quiet day of trade.
Air NZ upgraded its earnings guidance as it experiences strong demand both on domestic and international flights with full year profits for 2023 financial year expected to be between $510m to $560m. We continue to be neutral – Buffett’s letter from 2007 applicable here:
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
Pushpay received support for its revised scheme of arrangement, with 93.7% of votes (ex abstentions) in favour of the revised $1.42. The final condition is the High Court grants final orders approving the Scheme, and subject to the outstanding conditions being satisfied or waived and the Scheme Implementation Agreement not being terminated, the last day of trading in Pushpay shares will be 10 May 2023.
Australia
The Australian market (ASX200, -0.3%) fell to a two week low as investor sentiment dwindles.
Losses were mild and mostly broad-based, with most sectors trading lower. Health supplement company Blackmores jumped+22.8% after Japanese beverages company Kirin made a $1.9B takeover bid sending the stock to a 15-month high.
Vornado
Vornado owns a lot of prime real estate in Manhattan. They suspended their dividend as of yesterday. This is big! Usually if you own a REIT, you expect a dividend. This is part of why you buy it.
They own 660 5th Ave, 770 Broadway, The Crowne Plaza in Times Square and so on. You would think owning Vornado would give you pretty correlated returns to the New York’s red-hot real estate market. Not so! It’s lost 78% the last 5 years. The Miller Samuel Manhattan Luxury Property index (i.e. “prime” property) has increased steadily over the last 5 years (see below). On the other hand, Vornado faces tenants who aren’t coming back to work, high interest rates, and now a suspended dividend. It speaks to the issue a lot of commercial REITS are facing – higher rates and lower tenants. It begs the question: when prime real estate in Manhattan is facing devaluations, what becomes of B and C-grade property?