David Garrity on Bloomberg: Amazon Is Poised To Replace Facebook In Ad Dominance

Facebook earnings and outlook–and why Amazon may have the advantage in the advertising front.

To listen to replay, click here.

FB 4Q18 Results An Upside Blowout, But Time To Remind Management They Are Living Inside Others’ Platforms

FB 4Q18 results blew past expectations (Revs $16.91bn (Street $16.39bn), EPS $2.38 (Street $2.18)) that had been tempered by the recurring prevalence of negative developments around the company. While key performance indicators were positive, 2019 guidance calls for profit margin compression as expense growth acceleration will occur against a backdrop of revenue growth deceleration. On top of rising costs, management indicated that regulators globally are likely to continue to impose enhanced scrutiny of the company’s activities with the possibility that substantial fines will be imposed. More important for investors to note is the move by AAPL to limit FB access to the Apple AppStore, something that clearly underscores a strategic vulnerability as FB relies substantially on this channel to access the installed base of Apple iOS-powered devices. Dealing with public sector regulators is one thing, but going up against a dominant private sector player who runs a major technology platform that FB critically relies on should encourage investor caution in this name.

As FB’s position in the online advertising duopoly with GOOGL comes under increasing scrutiny on a number of fronts, we believe this offers AMZN an excellent opportunity to present itself to advertisers as an attractive alternative to an increasingly compromised FB platform. As such, look for the duopoly to become a three player game in which FB is strategically challenged.

MSFT 4Q18 Results Essentially In Line, Cloud Revenues Show Solid Growth

MSFT 4Q18 results were essentially in line with expectations (Revs $32.47bn (Street $32.53bn), EPS $1.10 (Street $1.09)) with Cloud services ($9.4bn, 29% of total revenues) growing +48% year/year to maintain MSFT’s #2 position in the market behind AMZN’s AWS operation. Separately, MSFT benefitted from the year-end holiday season as Surface laptop and tablet sales rose +39% year/year. Overall, MSFT appears positioned for solid growth in 2019 as the company is finding ways to work with its enterprise client base to bring its technology deeper into how they operate as they embrace tech intensity. Slowing global economic growth may limit MSFT progress in its more traditional business software lines, but management appears to have the company positioned against solid secular growth trends in areas such as cloud computing. Investors should find MSFT shares attractive at current levels.

Fed Now Offers Markets The “Powell Put” To Limit Downside Risk, Improves 2019 Equity Market Prospects

With yesterday’s Fed announcement that further interest rate increases are not now in the offing over the course of 2019, it appears the Fed is more focused on the impact of interest rates on financial market conditions than on actual business investment spending. With that Fed Chair Powell has demonstrated that the “Fed Put” remains alive and well during his tenure. This was clearly understood by the equity market as price levels soared higher after the 2:30pmET press conference. It may not be an “all clear” for investors as major issues still hang over the market (e.g. US/PRC trade negotiations, Brexit, possible 2nd US Government shutdown), but the path towards further market appreciation is for now not blocked by the Fed tightening interest rate policy. Not back to the races, but equity prospects are not as negative as earlier.