Amazon, Microsoft & Google Report Great Results

AMZN, GOOGL & MSFT Beat Expectations

Thursday afternoon was a big moment for the market because AMZN, GOOGL, and MSFT reported great results. This will send the Nasdaq soaring into the holiday season. AMZN stock had stalled in the past few months as the company reported a bad quarter 3 months ago. Thursday’s report caused the stock to rally 7.58% after hours, nearing its all-time high. AMZN reported EPS of 52 cents which beat estimates for only 3 cents. Revenues were $43.7 billion which beat estimates for $42.14 billion. Amazon Web Services revenues were $4.58 billion which beat estimates for $4.51 billion. This is a 42% increase from last year. AMZN’s operating profit fell by 40% as the company continues to invest in new businesses. The operating expenses increased 45%. Amazon’s fourth quarter revenue guidance was for between $56.0 billion and $60.5 billion which was as expected as estimates were for $58.9 billion in sales.

The employee count increased by 160,000 as the company ramps up for the holiday season. 87,000 of those new workers were from Whole Foods which had about $1.3 billion in sales. The keys for Amazon are maintaining its growth in Prime Members and keeping market share in the cloud business. Investors trust Jeff Bezos will make the Wholefoods acquisition work. As long as investors trust Bezos, the stock will go higher when estimates are beat even if profit margins barely exist (they were 0.8% this quarter).

Alphabet - GOOGLE also reported a great number. This means the momentum tech behemoths are 4 for 4 in terms of beating estimates (NFLX, AMZN, MSFT, and GOOGL). The two that remain are Facebook- FB and Apple - AAPL. GOOGL’s stock rose 2.92% after hours on the great report. This will be an all-time high if it holds that price on Friday. Adjusted EPS was $9.57 which beat expectation for $8.33. Revenue was $27.77 billion which beat estimates of $27.2 billion. Sales were up 24% from last year and EPS was up 32%. The other revenues were up to $3.45 billion from $2.43 billion as Pixel 2 pre-orders were over double last year’s Pixel 1 pre-orders. There have been some manufacturing mistakes found in the Pixel 2 XL; it will be interesting to see how much that hurts sales. In response to the European regulatory fine, CFO Ruth Porat said "We do feel good about the steps we took, but it's early. Under the remedy, comparison shopping services have a new opportunity to use shopping ads to advertise on Google.com in the relevant countries. Our Google shopping service in these countries will operate in the same manner, bidding alongside comparison shopping services." It will be critical for Google to avoid another heavy punishment.

Finally, Microsoft - MSFT beat expectations as well. The stock was up 4.55% after hours, meaning it will reach another new all-time high on Friday. EPS was 84 cents which beat estimates for 72 cents. Revenues were $24.54 billion which beat estimates for $23.56 billion. The cloud business passed the $20 billion revenue run rate mark showing there’s room for both Amazon and Microsoft to succeed. Revenue for Azure was up 90% and Office 365 subscriptions revenue was up 42%. The number of Office 365 subscribers increased from 27 million to 28 million. The gaming segment is about to get a boost from the release of the Xbox One X. The one weak spot is LinkedIn which had $1.1 billion in revenue which was flat sequentially. I consider LinkedIn to have the same problem Twitter has. LinkedIn and Twitter keep getting redesigned, but spam remains a problem. Recently, Twitter improved its cause by separating the inbox between requests and people you know. LinkedIn has too many recruiters spamming users making the experience unpleasant.

Tax Reform Progress

The House Republicans passed the Senate’s version of the 2018 budget resolution in a vote of 216-212. The bill faced scrutiny from the moderate Republicans because it eliminated state and local tax deductions. The House Freedom Caucus mainly voted for it despite the push for spending cuts not being answered. This is great news as it means the conservatives are willing to compromise. This decision to vote in favor of the Senate bill allows the next step to occur which is for the Republicans to unveil their tax reform bill. The legislation will be released next week; then the week after that the House Ways and Means Committee panel will consider it.  The self-imposed deadline for the bill to pass is Thanksgiving so it can get finalized by the end of the year. If the bill gets shot down or nothing is voted on by then, nothing will get done.

Currently, the individual tax cut has a 25% chance of passing and the corporate tax cut has a 28% chance of passing. Personally, I think the bill has about a 50% chance of passing, but I think it will fail in the end. It’s tough for anyone to know how this process will play out because there’s so much uncertainty about what’s in the bill. You can’t do the math on which members will be for it and which will be against it if you don’t know the details they are voting on. There was talk about putting a lower limit on the amount of tax free contributions people can make to their 401K plans. That appears to be squashed.

The problem is one of these unpopular policies needs to be passed. The money needs to come from somewhere. It looks like the elimination of the state and local taxes deductions is the answer. I think when the details come out even less of Congress will be on board. That’s why the 4 vote margin in the House for the reconciliation bill makes the odds tough. The only reason why I give it 50% is because the GOP needs to get something done to declare a victory. Politicians need an accomplishment to run their mid-term campaigns on. Even if it doesn’t include enough spending cuts, the conservatives will always like a tax cut. I will provide an update in the next week or two when the bill is unveiled.

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