Amazon Shows Potential Revenue Growth, But It May Not be Enough

Amazon raised all of its expenses to innovate, expand, and satisfy international countries and its current Prime subscribers while gaining revenue.

Amazon’s cost of goods sold is the largest portion of its expenditure, but its operating expenses are rising at a faster rate.

By: Brandon Peng

Date: March 23, 2015

Amazon reported a net loss of $241 billion and operating expense rose 20.5 percent for year 2014, yet it continued raising its capital spending; analysts switched to “hold” position.

For more than six years, Amazon’s annual operating expense kept on rising, from $3.4 billion in 2008 to $26.1 billion from 2014. Because Amazon never paid dividends, most of its earnings were reinvested on improvements instead of paying it to its shareholders. Amazon’s Chief Financial Officer Tom Szkutak said it’ll continue spending more on developing new products, building more fulfillment centers and improving customer service.

Analyzing its operating expense, Amazon constructed over 15 fulfillment centers, equipped with 15,000 robots to U.S. centers, vision systems and developed software. For spending on these improvements, technology and content expense rose to $9.3 billion, up 41.3 percent. It also included cost to improving Amazon Web Service: Amazon’s online service that assisted in managing database for clients with cloud. New software such as Amazon Aurora, AWS Lambda, and Amazon WorkMail were integrated to serve over one million active users.

In its online retail side, fulfillment expense rose to $10.8 billion, up 25.4 percent: the cost spent on fulfilling orders for outside sellers’ products using Amazon platform, operating fulfillment centers and expanding fulfillment capacity. With its higher annual Prime membership fee to $99 from $20 on March 2014, fulfillment expense included cost to innovate its products/services to over 40 million Prime subscribers, such as its new one-hour delivery and Prime photo.

Despite Amazon adding more equipment, Morningstar Director of Equity Research R.J. Hottovy is concerned about Amazon’s volatile spending pattern; it could lead to poor decisions in capital allocation, despite its potential growth. Products fulfilled by Amazon sold were up 50 percent and revenue was up 42.5 percent to $29.3 billion in the last quarter. However, the $170 million spent on Amazon’s new Fire Phone and 2014’s net loss made Hottovy questioned Amazon’s priority in its long-term investment strategy.

Along with Amazon’s questionable expense allocation, JPMorgan Internet Analyst Doug Anmuth said he was concerned about Amazon not making enough net profit in 2015. With Amazon following its plan, Anmuth sided with a “hold” position on Amazon’s stock. “We think Amazon remains a share gain story in media and electronic gaming monthly. However, we expect continued investments in international, AWS, and content to negatively impact near-term profitability.” said Anmuth.

Amazon still didn’t post the release date of its 2015 first quarter earnings report. About two months after releasing its annual earnings report, Amazon’s stock price opened at $378.89 compared to its $354.53 closing price on Jan. 30.

Fearing Greece Crisis

Investors danced in the market after Eurozone granted extension and Fed delayed interest rate.

                                                                                            Source: Bloomberg

Greece’s debt had been a significant factor to euro currency dropping in value.

By: Brandon Peng

Date: February 20, 2015

Market indices jumped globally as the European Union agreed to give Greece an extension to repay its loan, while the Fed continued to be “patient” on raising interest rates.

Throughout this week, the US market wobbled as Greece’s Prime Minister Alexis Tsipras and his Finance Minister, Yanis Varoufakis, and the eurozone finance ministers disagreed each other’s proposal to aid Greece’s debt repayment. In response, the S&P 500 and the Dow Jones Industrial Average were volatile as their talk progressed. After criticism from Germany officials doubting repayment from Greece, their meeting ended off today with eurozone granting Greece the repayment extension, but only for four months until June 2015.

This week had no trading on Monday, but the Dow Jones Industrial Average ended it by climbing 154.67 points to 18,140; an all-time record with 0.86 percent gain. S&P 500 closed at 2110 after climbing 12.85, a 0.61 percent gain. And Nasdaq finished at 4956 after climbing 31.27, a 0.63 percent gain.

Based on indexes, the global market were in relief that Greece didn’t make a euro exit, a discontinuation of Greece using euro as its national currency. If the agreement was not made before Greece’s debt repayment date, after Feb. 28, then Greece’s euro exit would have unsettled the global market. According to AP business writer Ken Sweet’s interview with Christopher from Wells Fargo, Greece’s euro exit could have disrupted the global market despite its small economy.

Other issues that had an impact on trading this week, the Fed released its FOMC minutes but the details on when interest rates will rise were not specific, and the Fed kept replying back “patient”.

According to Lindsey M. Piegza, chief economist of Sterne Agee, the Fed was concerned about factors slowing the US economic recovery, such as “international developments” from Greece’s financial crisis. “Furthermore, some participants wanted to see further improvement in the labor market. Some participants believed that considerable labor market slack remained”, said Piegza.

In the upcoming week, Greek officials’ successful deal left them making economic reforms by Monday, for eurozone officials to judge. Meanwhile, the Bureau of Labor Statistic will update the consumer price index and jobless claims, and the Bureau of Economic Analysis will release the latest GDP (gross domestic product). Based on the results, they may affect the Fed’s next FOMC meeting on March 17-18, 2015. 

Invest into Advertising Experience

Facebook continues to expand by acquisitions and changing its business model for growth. Its stock value grows into a feasible investment.

By: Brandon Peng

Date: May 16^th, 2014

Looking like it will have more significant peaks.

Facebook has an up-scaling growth over the past 2 years by focusing on mobile advertising instead of desktop advertising. In Facebook’s first quarter in 2014, its revenue from advertising was $2.27 billion, 82% more than 2013’s first quarter.

Facebook counts its users by DAU: daily active users. With more DAU, the more revenue Facebook makes with viewership on advertisements. With about 59% of advertising revenue from mobile advertisement, Facebook seeks more DAU by acquisitions. For its focus on growing more viewers, Facebook is a recommended investment before it grows enormously.

In 2013, Facebook’s business model isn’t to push ads, but to increase the quality of its advertisements. Mark Zuckerberg said during the 2014’s first quarter conference call, “… I think overall what we’re trying to do is make it so that the individual load on a per-person basis isn’t increasing at a dramatic rate; but instead, we’re driving most of the wins in user experience, advertiser performance and our own revenue through increasing the quality, primarily around News Feed ads.” With more satisfaction of advertisements on Facebook, the more it can try to get viewed.

With recent acquisition of WhatsApp in February 19^th, 2014 for $19 billion, Facebook is trying to expand the mobile network between advertisements and users. Whatsapp is a popular mobile communication app in Latin America, India, and Europe with about 450 million users monthly. In the conference call of Whatsapp’s acquisition, Zuckerberg doesn’t intend on giving WhatsApp a monetizing start of ads flying around, but he does plan on it in the future. And once it does, the DAU and advertisement revenue would skyrocket.

Financially, Facebook revealed gross revenue about $2.50 billion; about 72% increase from the first quarter a year ago. Further comparison, the 2012’s first quarter’s gross revenue was $1.6 billion before. 2014’s first quarter’s net income follows the same pattern of $642 million; more than double of $219 million from 2013’s fourth quarter! DAU has been on the rise to 802 million users at 2014’s first quarter, since 526 million DAU at 2012’s first quarter.

It doesn’t have any specific competitors, but according to an updating collection list, it does have an estimate of 405 mobile advertisement network competitors in the market. According to eMarketers, Google with its Admob is one of Facebook’s biggest competitors in the mobile advertisement network, holding a large estimate of 46.8% of the mobile ad market share. Before in 2013, Google was holding about 50% of the mobile advertisement market share, and as Facebook grow Google shrinks.

Facebook’s stock has been climbing up in value for two years. Its 2014’s first quarter announced that its EPS, earnings per share, broke the ceiling with $0.25. It’s almost double the EPS of the EPS three quarters ago of $0.13, and $0.25 beats NASDAQ’s consensus forecast by about 39% more than expected. Facebook’s embarrassing IPO, initial public offering, is long ago in the past. Now its $38 per share IPO skyrocketed to around $60 per stock in 2014’s first quarter. P/E ratios, price-earnings ratio, currently 96.53 at Wall Street Marketwatch, but overall analysts at Wall Street and NASDAQ still strongly recommend investing into Facebook’s stocks.

By overall information, Facebook has shown define growth. Several investors shown to regret not investing into Facebook during its poor IPO, and didn’t see how far Facebook’s stock could have grown. Instead of regretting for not taking advantage of its network globalization, invest into it now before it explodes more DAU and advertising revenue. But also see it as investing into new social platform.

Oculus VR, an acquired virtual reality technology company at March 25th 2014, will be used to further increase Facebook’s user experience. According to Zuckerberg, he plans on connecting different people globally with its virtual technology. If Oculus pulls off a virtual reality technology that slides in advertisements, people everywhere would want to try it out.

Goldman Sachs’s analyst, Heather Bellini, who has been looking at Facebook for almost every quarter vouches for Facebook’s performance: “Consensus is currently modeling 2Q14 mobile ad revenue…. While we do not see estimates for the balance of the year changing by the same magnitude as they did off of the 4Q13 print, we see enough of a positive estimate revision to continue to drive outperformance in the shares.”

Who knows what the future Zuckerberg is thinking about with Oculus’s virtual technology as a social platform: “Imagine enjoying a court side seat at a game, studying in a classroom of students and teachers all over the world or consulting with a doctor face-to-face -- just by putting on goggles in your home.”

Facebook’s Bet in the Future by Acquisitions

Facebook’s recently acquisition with Whatsapp and Oculus VR and experts expect growth within the first quarter.

By: Brandon Peng

Date: April 9^th, 2014

Who's next?

Facebook seems to be winning bets in the market while holding on to Zuckerberg’s philosophy. After acquisitions of Whatsapp and Oculus VR, stock prices up by 7.25% in April 9^th, 2014, while waiting for its 2014 first quarter report.

Facebook acquired Oculus VR at March 25^th 2014, a virtual reality Technology Company that was found recently in 2012 by Palmer Luckey, for about $2 billion. Before, Facebook also acquired Whatsapp in February 19^th, 2014, a popular mobile communication app in Europe, India, and Latin America with former CEO Jan Koum for about $16 billion. Analysts at Wall Street were shaky about Facebook’s growth with its investment into acquisitions.

To people that are questioning its decision, Mark Zuckerberg, Facebook’s famous CEO, shows to hold on to its strategy announced in his 10-K annual earning report: “We intend to increase the size of our network by continuing our marketing and user acquisition efforts, enhancing our products including mobile applications, and making Facebook more easily accessible to people throughout the world.”

Backing Zuckerberg’s philosophy, his company’s investment to morph Facebook into a mobile business to extend communication to everybody shows results. According to its latest January earning report, its revenue skyrocketed by 63% over the past year. Gross revenue has been increasing to $2.58 billion compared to its pervious third quarter of $2 billion, and an astonish increase from $1.58 billion from four quarters ago. Net income has also been increasing with no staggering to this quarter’s $523 million from third quarter’s $425 million and a feeble $64 million a year ago. Most of its generated revenue comes from advertisement revenue; as much as fourth quarter mobile ad revenue of $1.25 billion to be nearly as large as the total ad revenue in last year’s fourth quarter earning report.

Furthering the optimism, David Ebersman, the chief financial officer of Facebook, shows an indication of revenue growth beyond his expectation of advertisement shown on mobile devices in January 2014 conference call: “…about mobile and desktop impressions, as you know, per user or per unit of time on the desktop, we show a higher number of ads, because there’s the right-hand column ads in addition to News Feed, but we’re extremely pleased with how well the News Feed ads continue to perform…”.

With the combination of users from Whatsapp’s and Facebook’s database, analysts expect advertisement revenue to increase even more with more expected viewership. But according to Zuckberg’s answer to Doug Anmuth’s question of relation between Whatsapp and Facebook’s advertisement during their WhatsApp conference call, a senior Vice President of JP Morgan and senior research analyst that covers the internet, Facebook would not show advertisements for revenue in Whatsapp: “I don’t personally think that ads are the right way of monetized messaging service”.

Without the use of advertisement revenue from the acquisition of Whatsapp, Facebook could still grow with the priority of growth rather than revenue, as indicated by Koum during the Whatsapp Conference Call.

While the balance sheet doesn’t absolutely reveal the influence of Facebook’s growth by Whatapps and Oculus, the current stock market could. With the acquisition of Facebook with Whatsapp, Facebook’s stock value has been increasing in value to $68.06. Then with Facebook’s recent acquisition with Oculus, the stock was valued at $64.89; it overall shows the increasing value since the closing price of their stock was $54.65 in the fourth quarter. The EPS, earning per share, has skyrockets to $0.59 since the $0.20 EPS announced during the fourth quarter. And the price per earnings ratio jumps from 88.14 to 105.78.

While extending to Oculus, Anmuth of JP Morgan commented of Facebook on March 26th: "Facebook believes virtual reality is the next major computing platform after mobile and if this is the case, we believe the Oculus acquisition will allow Facebook to shape and benefit from the evolution of virtual reality into mainstream communication and media."

Unemployment Rate is a Number

The new unemployment rate does not accurately reflect how the economy is really doing

By: Brandon Peng

March 11^th, 2014

About 4 years of constantly decreasing unemployment rate since the beginning of 2010, it shockingly returns back up to 6.7% this February. But that 0.1% should not matter.

Contrary to U.S’s economy slowing down by the revealed unemployment rate, it’s still stabilizing and progressing. According to the U.S Bureau of Labor Statistics, an agency of the federal government that calculate statistics of the U.S economy, we gained a back to the average rate since June; we have 175,000 new employments now.

 A huge section of those 175,000 new recruits belongs to the employment of 79,000 employees from professional and business service industry, with the average of 56,000 new employees for the past 12 months. The sections within that industry with the most noticeable gain are accounting and bookkeeping service with 16,000 new recruits, temporary help center with 24,000 new recruits, and service to building and dwelling with 11,000 new recruits.

Comparing the professional and business service industry’s statistics 2 months ago, it’s been steadily increasing from 19,000 new recruits in December and 36,000 new recruits in January to today. It holds accounting and bookkeeping as the industry that changed the most, from loss of 24,700 employees in December to now!

Another growing industry is the wholesale trade industry with a 15,000 gain with the average of 9,000 new employees. It constantly increases as well with 15,400 recruits in December and 13,900 recruits from January to now.

In contrast, the industry that lost the most is the information industry, fueling the unemployment rate by dropping 16,000 employees with its most volatile section: the motion pictures and sound recording industries. Out of that 16,000 dropped, 14,000 employees are from that section alone. The volatile section dropped 13,700 employees in December, gained 6,100 employees in January, and then plummeted again by 14,000 today.

With that industry being extremely volatile, there’s not much of a leading factor to unemployment rate not progressing. Keith Hall, a former chief Economist for the White House Council of Economic Advisers, stated that we’re progressing, but the rate increased because labor force increased while the labor force participation rate steady decreased.

In comparison to 12 months ago, labor force participation rate has been decreasing from 63.5% to 63% and it keeps on decreasing compared to January 2008 with 66.2%.

Explanation of the decreasing labor force participation has a strong relationship with the recent snowstorms engulfing average weekly work hours per employees. Average workweek of all employees regardless of industry in the U.S dropped as high as 0.6 hours per week.

Federal Reserve’s officials are well aware of the unemployment rate with the labor force participation. According to its February 2014 monetary policy report, it sees the unemployment rate simply stabilizing itself. It still sits comfortably on top of the Federal Open Market Committee participants' estimates of what is considered as long-run sustainable rate.

In February since the last Federal Open Market Committee, it obliged itself to purchase long term treasury securities at $35 million instead of $40 million and agency mortgage-backed securities at $30 million instead of $35 million. But based on the positive stable report recently, the Federal Reserved will continue to buy even less bonds assets of their bonds purchasing program.

The MarketWatch of Wall Street Journal predicted that the unemployment rate would keep decreasing to 6.5% two weeks ago. And now the future of March’s unemployment rate may be too predictable to becoming a long-run sustainable rate.