The march of Amazon and other US tech giants to world domination can sometimes seem unstoppable. Investors who have bought into the Amazon story have rarely been let down either. Amazon’s share price performance since the millennium stands at +2,345%.
Last year tech stocks were in overdrive until the autumn, when almost all took a big tumble. But Amazon is still up more than 25% on this time a year ago, and a reading of 90 on its price to earnings ratio – essentially a measure of investors’ hopes for the future – suggests that its stellar growth is expected to continue.
But, as always, investors will be on the lookout for signs the sheen might be rubbing off when the company reports its results for the first three months of the year on Wednesday, after it acknowledged it had come up against some bumps in the road.
Jeff Bezos, Amazon’s founder, has certainly had a tricky time of late, going through the world’s largest divorce. The world’s richest man has also had to contend with alleged interference in his private life by the Saudi state, as well as the bitter public campaign against Amazon’s plans to open a new major office in New York.
On the corporate front, the Amazon machine recorded a third consecutive record quarterly profit at the end of 2018 – a cool $3bn. However, even as it unveiled the new record, it signalled that the strong finish to the year may not be repeated in the first quarter, amid further heavy investment in an array of big strategic bets, from drone delivery systems to cloud computing.
Amazon has also come up against problems outside its home markets: it will shut its Chinese online store by 18 July, basically admitting that the grip of entrenched local platforms Alibaba and JD.com was just too strong. (Hard-pressed retailers in Amazon’s main markets are unlikely to feel particularly sympathetic.) The firm has also been dented by regulatory action in India, another big source of potential new customers.
Amazon’s search for more growth is mirrored across the big US tech firms reporting earnings this week, as penetration in its home market starts to plateau.
For Twitter – finally profitable last year, 12 years after it was founded – the number of daily active users is the key piece of data, because the more user engagement, the more potential revenues, even if top-line growth in the number of tweeters slows.
When growth prospects stutter, the results can be brutal. Snap, which reports its first-quarter results on Tuesday, is just such a cautionary tale. The social media company behind the Snapchat photo messaging app is now worth just half of its value when it floated, to a rapturous reception, two years ago. Now analysts fear its US user base will shrink in 2019, and losses are expected to continue for the next two years at least. Recently floated social media company Pinterest, beware.
Of course, the big tech firms have proven naysayers wrong before. Facebook had a particularly grim 2018, after the Cambridge Analytica scandal and other, increasingly regular, data and political furores. Nevertheless, it is expected to report a big jump in quarterly revenue, with analysts expecting an increase of about 25% year-on-year to just shy of $15bn.
Analyst Alex de Groote believes the tech companies will ride out their troubles, with investors believing they can continue their inexorable expansion. He said: “2018 was a really tricky year for social media and internet companies. However, 2019 has been a total turnaround.”