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Amazon / Baidu Results – Away from

Both companies being driven by new businesses Amazon Q1 16 Amazon reported mighty results as Amazon Web Services (AWS) grew by 64% YoY and contributed 55% of group EBIT despite only contributing 9% of total sales. Q1 16 revenues/EBIT/EPS were $29.1bn/$1.07bn/$1.07 compared to consensus at $28.0bn/$584/$0.59.

Although North America remained nicely in the black, the star of the show was AWS which generated $604m of EBIT accounting for almost all of the better-than-forecasted performance. This strength also underpinned guidance where Q2 16 revenues/EBIT are forecasted to be $28.0bn – $30.5bn (midpoint $29.25bn)/$375m – $975m (midpoint $675m) compared to consensus at $28.4bn/$878m. Despite being the largest cloud provider, AWS gained share during the quarter and is increasingly looking unassailable. Its huge scale gives it the ability to offer global points of presence which meaningfully improves performance for global companies and it can offer this with lower costs. Furthermore, the underlying AWS software upon which companies build their IT operations is unique to Amazon, making switching an increasingly difficult and painful process. Hence, we expect AWS will remain strong which combined with the steady progress in retail keeps the overall growth outlook positive.
However, the same cannot be said for the valuation.

Even including an EPS upgrade to $6.00 for this year and $10.00 for 2017 leaves the company trading on 113x ‘16E PER and 68x ‘17E which remains way too rich in our view . Amazon’s valuation has been discounting future profits for years and now that they have arrived, it is time for the multiple to begin returning to normal levels.

Baidu Q1 16.
Baidu reported results that met expectations as profits from its dominant position in search continued to be ploughed into O2O and online video investments. Q1 16 revenues/EPS were RMB15.87bn ($2.4bn)/RMB2.2bn ($340m) almost exactly in line with consensus at RMB15.82/RMB2.2bn.

Mobile now makes up 60% of revenues with Baidu’s ecosystem reaching 663m users meaning that 89.1% of Chinese mobile users are actively using its services. However, this looks like a slight loss of market share as in Q4 15, we estimated that Baidu’s ecosystem reached 89.8% of China’s smartphone users implying that Qihoo and Sohu have gained slightly in Q1 16.


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