On Wednesday, Microsoft (MSFT) shares gave up more than $10, or 4.37%. Amazon (AMZN) had a better day than Microsoft, surrendering just 0.79% for the session after having confirmed that it would be taking on some more debt, under somewhat shaky circumstances.
There is a connection between the two, as both have one industry in common.
Both have helped the corporate world move off premise and into the cloud. Both have supported the digitization of global commerce. Never mind that one has long been a provider for commercial and personal software and the other an e-commerce giant that uses that business to drive advertising revenue.
There is significant commonality between the two.
Tuesday Night
Amazon confirmed in an SEC filing that it had reached an agreement with certain lenders to provide it with an unsecured $8B loan to be used for general corporate purposes. The loan matures in 364 days with an option to extend the life of the loan for an additional 364 days.
The interest rate paid will be the secured overnight financing rate plus 0.75%. Should the option to extend be exercised by the borrower that spread moves up from 0.75% to 1.05% for the second 364 day period. Hmmm.
As of the end of its September quarter, Amazon had a net cash position of slightly more than $58B on the balance sheet and combined short-term and long-term debt of more than $78B. The company closed out that quarter with a current ratio of 0.94 -- the third consecutive quarter that Amazon posted a current ratio of less than 1.0.
This, for many investors, including this one, is not really all that acceptable. Additionally, Amazon also had more than $36B in inventory at that time, up 18.5% from September 2021, and up 54.4% from September 2020. Again... Hmmm.
Wednesday Morning
Highly rated (5 stars at TipRanks) Karl Keirstead of UBS downgraded MSFT to a "neutral" rating from a "buy" and took his price target down to $250 from $300. Keirstead wrote: "Azure is entering a steep growth deceleration that could prove worse than investors are modeling." Ouch.
Azure, and other cloud services have been the driver behind the growth experienced in Microsoft's "Intelligent Cloud" segment, which has easily outpaced growth across the rest of the company of late.
Keirstead, who is a five-star analyst among five-star analysts, sees Azure as close to reaching "maturation." Adding insult to injury, Keirstead is not so hot on Microsoft Office either, which is in the Productivity and Business segment.
So I ask myself: If Azure is slowing or about to slow, what does that say about Amazon's AWS? The two compete head to head.
Wednesday Evening
On Wednesday evening, with the Santa Claus rally already secured for the S&P 500, Amazon announced plans to reduce its headcount by 18K positions, which is up from the 10K that had been previously announced. Layoffs are, according to the company, being accelerated due to economic uncertainty.
In summary, Amazon needs to borrow a lot of dough, sort of on the short-term. This will weaken a balance sheet that, as I mentioned above, is already in a serious state of deterioration. The company is addressing an overbearing cost structure by increasing its plan to reduce employee-based overhead.
This is all while investors in Microsoft are being warned that Azure, which is chief rival to Amazon's AWS, is reaching maturity amid slowing growth.
Well, AWS is Amazon's engine for both growth and margin. Hide out in certain areas of tech? Expecting the national/global transition from on premise computing to the great data center in the sky?
Does this have further implications for other competitors in the space like Alphabet (GOOGL) , Oracle (ORCL) and IBM (IBM) ? Does this imply that the chip makers behind data center implementation will also hit a brick wall? I mean more so than they already have.
I'll Tell You What...
Microsoft is expected to report in three weeks, Amazon reports a couple of days after Microsoft. Amazon is expected to post earnings "growth" of -85% on revenue growth of roughly 6.5%.
The layoffs are a step in the right direction (from management's perspective). Will they be enough? Will there be a secondary or tertiary round? Amazon did add more than 300K positions throughout the pandemic.
Microsoft is seen posting earnings "growth" of -6.5% on revenue growth of 3.9%.
Can an investor afford to be long both of these names going into a recessionary period? I cannot. Microsoft trades at 24 times forward-looking earnings and pays a dividend. Amazon trades at 77 times.
I think of Microsoft CEO Satya Nadella as one of the smartest individuals that I have ever listened to. He has made me money. He has, in effect... gained my trust.
Amazon CEO Andy Jassy? I mean no disrespect, but he has not made me money. I still don't really know what to think of him. I do wonder if Jeff Bezos somehow timed his exit as chief executive perfectly and left this poor guy in charge of an empire about to crumble.
Did I mention Microsoft's balance sheet? Absolutely golden. Fortress-like. Cash balance almost four times debt-load. Current ratio of 1.8.
For me, this is no contest. I halved my long position in Microsoft months ago. I exited Amazon a while back as well, though I have traded in the name (not invested in) since.
On Wednesday I started to buy back some of the Microsoft that I had sold last year on this weakness. The position stands at about 50% of where I ultimately see it. I will add on further weakness.
Amazon? Not now.
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