Amazon - Tech Leads Market Lower
The FANG stocks are down 15% on average from their 52 week highs. Even though I have been saying Twitter and Facebook are buys for the long term, it’s fair to say I have been wrong as both have continued to fall.
Twitter fell 4.18% and Facebook fell 1.07%. I think Netflix is a great indicator of market sentiment. It’s 3.9% decline on Monday shows how the positive momentum has reversed. Even Amazon and Apple fell 3.16% and 2.66%.
The sell side research pushed Apple’s full year 2019 revenues up $10 billion because of the new iPhone lineup. Current blended 2019 average estimate is $279 billion with the low end of the range being $264 billion.
Amazon Smart Everything
The big news from Amazon came after the close. It will be releasing 8 new Alexa powered devices including a microware, amplifier, receiver, subwoofer, and an in-car device.
Sonos stock dropped 1.97% on this news in the after hours session. That stock has been a huge loser since its IPO as it is down 25% since its first close on August 2nd.
Amazon is going from having Alexa work as a feature on third party products such as Sonos and Garmin, to releasing its own products besides just speakers.
This vertical integration will be tough as creating new products for the house is a new venture. It will increase the profits Amazon makes per sale and give the company more control of software and hardware integration.
If Amazon wants, it can stop allowing 3rd parties to use its Alexa platform. That would give its new products a huge competitive advantage. The one issue would be it would lose the valuable ability to suggest purchase on Amazon using third party products.
As you can see from the table below, Amazon branded products should do well as Amazon has the highest reputation according to the 2018 Harris poll.
If Amazon messes up, it risks its reputation which will hurt other parts of the business. However, it will start out by getting the benefit of the doubt which is a huge advantage.
Alexa will soon start to suggest sponsored products which is a game changer.
Amazon - Already Doing Well with Advertising...Beating Google.
Amazon’s share of product searches increased from 46% to 54% in the past 3 years while Google fell from 54% to 46%. 90% of Amazon product views come from its own search which means consumers aren’t starting on Google to buy Amazon products.
As you can see from the chart below, 8% of Amazon product views came from sponsored ads which is double last year. Amazon is on its way to becoming the biggest advertising company in the world.
This is the reverse of what Instagram is doing as Instagram is going from being an adverting company to directly selling products on its website/app.
Instagram and Amazon are two of the most valuable properties on the internet. Monetization is coming in the form of vertical integration.
Amazon - And an Update On Hurricane Florence’s Damage
Hurricane Florence is expected to have done from $17 billion to $22 billion worth of damage according to Moody’s. The estimate could go higher as the damage is assessed in more detail.
As of Friday, the damage was $10 billion to $15 billion which means more damage is already implied in the projection. Florence is one of the top 10 costliest hurricanes in history.
Zandi expects the impact to GDP to be between $1 billion and $2 billion which is a 0.2% hit. It’s now fair to say any growth rate above 3% will be a positive because of this negative impact.
It will be interesting to see the affect on the jobless claims report this Thursday. I don’t anticipate any long term economic impacts from this storm.
Amazon - And Bad News The On Trade Front?
The overall market sold off because of the bad news on trade. The S&P 500 fell 0.56%, the Nasdaq fell 1.43%, and the Russell 2000 fell 1.06%. Tech and consumer discretionary did the worst as they fell 1.39% and 1.27%.
Best sectors were real estate and consumer staples as they increased 0.49% and 0.35%. Interest rate sensitive names did well despite rising yields because the ‘risk off’ trade dominated.
The 10 year yield fell one basis point to 2.99% and the 2 year yield was flat at 2.78%.
After months of posturing, we now have our first real act in the trade war. President Trump is going to slap at 10% tariff on $200 billion worth of Chinese goods.
The tariff will raise to 25% by the end of the year if there’s no deal. The biggest fear about this trade skirmish is coming true which is why I am now calling it a trade war.
Trump is also considering taxing another $267 billion worth of Chinese goods. Specifically, Trump said “if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports."
In my opinion, that additional tariff is almost guaranteed to occur because China has been matching every tariff America has put on it.
The odds of a new agreement don’t seem high in the near term because White House officials had been negotiating with Chinese officials in the weeks leading up to this announcement. I don’t think an act of aggression is going to encourage compromise.
The good news for Apple is the White House eliminated 300 goods from the previously announced list such as smart watches, chemicals, bicycle helmets, and high chairs.
The Apple Watch, Airpods, and HomePod won’t be affected. Some products such as the Mac mini will be affected by the tax, but it shouldn’t be a big deal for the firm. Even though it was mostly spared, the stock fell 0.75% after hours.
The S&P 500 futures implied a 9 point decline as of Monday night. If you include today’s decline in the total reaction to this announcement, I think the S&P 500 will fall 5%. The biggest reaction will be when China responds to this tariff announcement in the next few days.