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Tech Daily: The Google Story & Much More

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Alphabet’s (GOOGL - Free Report) earnings, NVIDIA’s (NVDA - Free Report) new cloud gaming platform, Twitter’s (TWTR - Free Report) actions on manipulated content, Amazon (AMZN - Free Report) loaning and valuation, Apple’s (AAPL - Free Report) China outlook and more stories are covered in this roundup. Check out the details-

Alphabet Earnings

Alphabet reported earnings of $15.35 a share (The Zacks Consensus Estimate was $12.76). Revenue of $37.57 billion was however short of the expected $38.44 billion. Despite the revenue miss, investors welcomed the disclosure of YouTube and Google Cloud contributions of around $15 billion and $9 billion, respectively. YouTube’s contribution disappointed many, but the unit’s 30% growth rate was exciting.

Google Cloud’s growth rate of 53% was also encouraging, although Microsoft (MSFT - Free Report) Azure’s 63% growth and Amazon’s 2015/16 growth rate in the same ballpark means that the business should do better. Since the market continues to expand, there’s no reason to think that it will be a winner-take-all situation. Alphabet continues to build both these businesses and is getting ready with a new ad format for YouTube that can turn it into something of a marketplace.    

Things like hardware that CFO Ruth Porat called a "multi-billion dollar business," clearly didn’t do as well this quarter but the company is taking a long-term approach to this business. The inherent opacity of the search business makes it difficult to determine where it’s going, but judging from the strong growth off such a large base, this isnt something we should be losing sleep over. All told, YouTube may have missed expectations and investments in capex and headcount may continue, but this remains one very solid company. Here are some analyst comments -

Brian Nowak of Morgan Stanley was impressed with Google’s “ability to innovate and drive engagement and monetization across its 9 products with 1 billion plus users -- while exercising discipline and capital returns.” He wasn’t too put out with the decelerating growth in search, attributing it to the law of large numbers.

On the other hand, he praised “the still-strong engagement, advertiser value and monetization” that was driving the “durable growth” in the segment. As regards the new disclosures, he said that YouTube was 30% smaller than expected while Google Cloud was tracking about as expected. He’s looking for more color on “budding monetization engines like Maps, Discover, and e-commerce suite of products.” He reiterated a Buy rating and price target.

Eric Sheridan of UBS, while agreeing that “short-term heightened investor expectations might cause stock price digestion” pointed to "long-term building blocks for equity value on display.” He was particularly enthused by better-than-expected revenue and operating margins, cloud business momentum, capital returns and increased segment disclosure, but noted that headcount and capex increases will weigh on results this year. He reiterated Buy rating and price target.
    
Justin Post of BofA liked the “shareholder-friendly” disclosures and buybacks. Noting the revenue and expense misses, he lowered the revenue target and raised the EPS target for 2020 in anticipation of higher interest income.

RBC Capital Markets analyst didn’t change estimates despite the expanding Google operating margins, increased share repurchases and cloud revenue growth. He was encouraged by the new revenue disclosure, but expected YouTube to be a larger business.

NVIDIA GeForce Now Cloud Gaming

NVIDIA has been working on its cloud gaming service for years and letting others like Google’s Stadia and Microsoft’s xCloud get in ahead of it. Turns out the company has a different plan, one that will not only give its users more choice from the get-go but will also feed its GPU business (both Google and Microsoft use AMD chips).

While the other cloud gaming platforms require you to sign up to a cloud console, GeForce Now allows you to use stores like Steam and Epic Games to access your owned or free-to-play games. The pricing is also attractive and includes a free tier. The free service allows up to an hour’s play, after which you may have to get back in the cue, especially during peak hours. The “Founders” version costs $4.99 for the first year and includes three months of free trial. NVIDIA hasn’t said what it will cost after that but anything up to $10 would be easy.

AMD Partnership

AMD has just signed a deal with Mercedes-AMG Petronas Formula One Team that will run its 2020 F1 car, including AMD branding, for the first time on Friday, February 14, 2020. The team is using AMD commercial solutions, including AMD EPYC server processors and AMD Ryzen PRO laptop processors to optimize their work streams. So this is both a revenue-generating deal and a branding exercise that should get AMD’s capabilities in front of other commercial users, helping it win even more deals.

Twitter Action on Manipulated Media

Three months ago the company said it would solicit public opinion on how to handle the problem of doctored videos being shared on its platform. The company has now decided on a course of action that will go into effect on March 5.

Accordingly, the company will now subject the content to a number of tests including, whether there were significant alterations made, whether it was shared deceptively, whether it’s a threat to public safety and whether it caused significant harm. If any of these tests fail, the media will be labelled and a warning sent to all those who interact with it. But if it has the potential to cause real-world harm, it will be removed.

The policy covers all doctored photos and videos, irrespective of the sophistication with which the tampering was done.

Twitter said in a blog post that the job would be handled by its “teams,” which seems to indicate that human beings will be in charge of determining what’s to be allowed or what not, which is different from Facebook’s (FB - Free Report) AI-driven approach and leaves room for human error of subjectivity. However, it also said that this isn’t the last word on the issue, so presumably, the mechanics will get better with time.

Amazon Reaches Trillion-Dollar Valuation

Amazon shares have been flirting with the magic number for a while, but yesterday it finally managed to close at that level. This is good news for the company and enabled its founder CEO who took the benefit of buoyancy in the shares to liquidate some of his holdings. He continues to own more than 11.5% of outstanding Amazon shares, according to data compiled by Bloomberg.

Tech giants Apple, Microsoft and Alphabet were the only ones that made the number earlier, and Alphabet dropped out for a bit after reporting its quarterly results.

Amazon Ecommerce Market Share

Justin Post of BofA has offered market share estimates of the top ecommerce players and Amazon of course retains the first position. Accordingly, Amazon is estimated to have a 44% share, up from 40% in 2018. Walmart is at just 7%, despite growing very strongly in recent quarters. eBay at 5% and Target at just 2% follow Walmart.

As far as growth rates go, the company recorded $79.8 billion in U.S. gross merchandise volume (GMV) in the fourth quarter of 2019, up 19% from a year ago. Walmart and Target also reported very strong GMV growth of 23.6% and 19%, respectively. eBay with its GMV of $8.9 billion was down 8.3%.

In 2020, Post expects Amazon to grow GMV 15.7%, Walmart 23.1%, Target 18% and eBay -5.8%.

Amazon Arranging Loans for SMB Sellers

The Financial Times reported that Goldman is building technology that would allow it to offer loans to small and medium-sized businesses through its Marcus lending arm over Amazon's lending platform. It won’t be the only one. Amazon’s own lending arm and various smaller regional players like Lendmark Financial Services and Finbank will also join the effort.

According to people familiar with the matter, some of the sellers are concerned about the fact that their personal information will have to be shared with the lenders in order to let them determine eligibility. But this shouldn’t be much of a problem because they would have had to share these details with any lender they were looking to borrow from.

On the other hand, going through Amazon could speed up the disbursal of funds because of a quick verification process and Amazon could later even step into the shoes of financial advisor, the deal certainly sets it up to get there.

For the small financial institutions, the deal will help them reach more customers. For Goldman, which has had limited presence in the consumer segment with next to no branches, the deal will expand this business. Goldman already has a partnership with Apple for its credit card that helped it access Apple customers.

So being a financial company looking to target consumers, partnerships with technology companies with big user bases is vital. Although Amazon is technically a retailer, it’s actually also one of the foremost technology companies. Its huge roster of regular customers therefore makes it the perfect partner.

Apple TV+ Take Rate Isn’t Exciting

Bernstein analyst Toni Sacconaghi estimates that in spite of Apple’s offer of a free year of Apple TV+ with its devices, only around 9-10 million people or 10% of its eligible customers opted for the service. The analyst mentioned a number of reasons why this may have happened.

First, it may have been Apple’s intention to keep the launch low-key in a quarter that is typically driven by very high hardware volumes because that would have “negative accounting ramifications,” or in other words, depress margins.

Second, Apple may have decided not to promote the offer too much. The analyst said there wasn’t any “prompt to accept the free Apple TV+ offer when setting up our new hardware device,” or strong use of push notifications that may have prompted more people to try the service.

The third reason he pointed to was the obvious one: that Disney+ launched at around the same time with a far better spread of shows. Apple in comparison has a very limited catalog of original programming that it really needs to work on.

Coronavirus to Have Limited Impact on iPhone Sales

Wedbush analyst Daniel Ives estimates that there will be limited impact of virus-related shutdowns at Apple’s China suppliers. Chinese players assemble all of its iPhones as well as many of its other devices. While the Chinese government issued directives to shut down factories until Feb 9, the analyst feels that at the most, this will push out sales of a million iPhones (3% of annual iPhone sales) into the June quarter.

He also said, "We do not view the impact of this virus epidemic as changing the numbers/merits behind the renaissance of growth in China for fiscal year 2020 and fiscal year 2021 with a 5G super cycle the longer term driver."

Another Wedbush analyst Matt Bryson reiterated an Outperform rating on Apple with a $400 price target while agreeing that the impact would be limited by up to a million phones that will shift to the June quarter if the virus scare persists. He thinks the limited transportation at this time is likely to be the spoiler for iPhone sales although the impacted is limited so far because most sales occur online and also because most of the iPhone and Airpod purchases related to the Chinese New Year have already been completed.

Apple also provided a wider-than-usual guidance for the current quarter that likely covers the impact of the virus.

Meanwhile, Apple suppliers Hon Hai Precision Industry, Quanta Computer, Inventec Corp and LG Display Co have all said that they expect to resume production on Feb 10. However, Hon Hai has pulled down its 2020 sales growth forecast from 3-5% (provided on Jan 22) to 1-3% as a result of the virus attack.

Dropbox CEO Drew Houston Joins Facebook Board

Facebook has announced that Drew Houston, co-founder and CEO of Dropbox, has been appointed to the company's board of directors as its eighth director, with immediate effect. This is a key appointment, because he brings “valuable perspective” as a “leader of a technology company with services used by millions of people and businesses.”

What’s more, “he thinks deeply about where technology is going and how to build a culture that delivers services that always work well." Dropbox has 14 million paying subscribers and 2,300 employees across 12 global offices.

Houston is Zuckerberg’s friend and the two have advised each other over the years. So bringing him on Facebook’s board, where he will be responsible for advising Zuckerberg seems like a good thing for shareholders, particularly since Zuckerberg’s total control over Facebook and his ability to override anything the board or the shareholders want has irked them in the past.

Irish Regulator Scrutinizing Google

Irish regulators have initiated a probe into why Google needs user location data and whether it is following due procedure under the GDPR as regards customer consent, transparency and disclosure. Specifically, it is looking into “the legality of Google’s processing of location data and the transparency surrounding that processing.” Google has said that it will “will cooperate fully with the office of the Data Protection Commission in its inquiry, and continue to work closely with regulators and consumer associations across Europe.

Location data is used by Google in offering services like maps and Waze; and this data is also shared with third party developers like food delivery apps.

Apple Antitrust Probe

Reuters reports that regulators have been getting in touch with certain iOS app makers, primarily focused on parental control apps that were dropped by the app store for non-compliance with its guidelines.

Apple apparently updated its guidelines and instead of giving these app makers time to update their apps, it dropped them from the app store while promoting its own app. Although they were allowed to re-enter after altering the apps to make them compliant, there was a significant impact on their businesses.

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