Region: US
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Fundamental View
AS OF 29 Aug 2024JPMorgan is one of the strongest and best positioned banks to navigate the current environment, with a well-diversified business model and good competitive positioning across a variety of lending and capital markets areas.
The company continues to deploy its considerable earnings power into reinvestment, specifically around technology where we are bullish on its ability to drive competitive advantages through strategic enhancements and efficiency gains.
Business Description
AS OF 29 Aug 2024- JPMorgan ranks as the largest U.S. bank by total assets ($4.14 tn at 2Q24) and deposits ($2.40 tn at 2Q24).
- JPMorgan ranks 1st in terms of U.S. deposits with approximately $2.07 tn in deposits at YE23 across 4,891 branches (S&P Capital IQ). JPMorgan's footprint includes New York (#1), Texas (#1), California (#2), Illinois (#1), Michigan (#1), Arizona (#1), Ohio (#5), and Florida (#4), among others.
- JPMorgan's major business lines include investment banking, retail banking, card services, treasury & securities services, commercial banking, and asset & wealth management.
Risk & Catalysts
AS OF 29 Aug 2024Succession planning at JPMorgan has a higher profile than many peers, with CEO Dimon (68 year-old) having held the top spot for over 15 years. Another recent round of shuffling top management did not yield much clarity, with presumed frontrunners Marianne Lake becoming sole CEO of the Consumer Bank and Jennifer Piepszak moving over to co-CEO of the new Commercial & Investment Bank segment, alongside Troy Rohrbaugh who has been running Markets & Securities Services.
The sector remains exposed to reputational, legislative/administrative risk, and cyber threats, although the significant tech spend over the past few years should (theoretically) result in a stronger position for JPM to manage the security threats.
Although not likely a credit risk, JPMorgan may continue to be acquisitive around non-bank financial and ancillary services; but we would expect any deal to be conservatively funded and looking to further technology and fee income strategies (e.g. payments or asset management).
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Key Metric
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CreditSight View Comment
AS OF 14 Oct 2024We moved back down to a Market perform on JPM following the SVB debacle and subsequent selloff; JPM was (rightfully) viewed as a flight-to-quality name amid the volatility, but continues to trade that way with spreads anchored 5-10 bp tighter to money center peers even after the rally. Supply could be a modest relative value technical headwind, though YTD issuance volumes have not been nearly as bad as feared; the prospects of a significantly watered-down Basel III endgame also reduces any supply overhang. There’s still value against broader corporates though JPM is no longer offering positive carry over IG, and there remain no real concerns with the core credit: the strength and resiliency of the diverse franchises has been on full display the past several years.
Recommendation Reviewed: October 14, 2024
Recommendation Changed: April 17, 2023
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
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Fundamental View
AS OF 29 Aug 2024WFC is a leading domestic bank with strong positioning across consumer and commercial lending asset classes and a top 3 deposit market share in the U.S.
The core credit risk profile remains solid; the company has actively shed non-core assets and business lines (including WFAM), both as a means of managing under the Fed’s asset cap and part of new-ish CEO Scharf’s streamline strategy.
The balance sheet is strong, but WFC continues to suffer from internal deficiencies across a range of compliance and risk mgmt. functions unearthed after the fake account scandal. Positively, the Fed reportedly approved WFC’s overhaul plans, a crucial step in the remediation process; WFC also continues to close outstanding consent orders, though some remain outstanding.
Business Description
AS OF 29 Aug 2024- Wells Fargo ranks as the U.S.'s 4th largest bank by total assets ($1.94 tn at 2Q24) and 3rd largest by total deposits ($1.37 tn).
- Wells Fargo ranks 3rd in terms of U.S. deposits with approximately $1.37 tn in deposits at YE23 and 4,379 branches across the U.S. (S&P Capital IQ). The company has leading market shares across its geographically diverse footprint, including in California (#3), South Dakota (#2), Florida (#2), Texas (#3), Minnesota (#2), and Georgia (#3).
- Wells Fargo's major business lines include U.S. retail banking, mortgage banking, consumer finance, corporate and middle market banking, and wealth management.
Risk & Catalysts
AS OF 29 Aug 2024The asset cap and associated regulatory remediation remains a millstone with a wholly unknown timeframe even after years of efforts. There was some risk that Wells could bleed share and franchise value in an economic recovery if the company cannot fully capture the business opportunity due to the asset cap, though so far that has not been the case given freed up balance sheet capacity earlier in 2020-22 and the sharp slowdown in loan growth since.
Wells Fargo faces reputational risk tied to those misconduct and business practices scandals, though likely fading with time and remediation progress; at 2Q24, WFC high-end estimable loss above legal accruals was $2 bn.
Wells has less fee income diversification as peers, largely due to the much smaller scale of the capital markets businesses and smaller presence in credit cards, both points of emphasis under Scharf as Wells embarked on aggressive card product refreshes and trading buildout.
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Key Metric
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CreditSight View Comment
AS OF 14 Oct 2024Our Outperform view is supported by a) spread value within the Big 6 peer group with WFC anchored at the wide end since SVB, despite trading firmly through bellwether JPM for most of the past decade; b) waning supply risk as a lighter touch Basel III endgame meaningfully reduces issuance needs with WFC the only bank bound by RWA; c) though unlikely to move spreads, when WFC is finally released from the asset cap it will have credible claim to the best-in-class risk management and compliance framework, which we think has real value for bondholders and should reduce headline/noise risk going forward; d) strong fundamental risk profile highlighted by 11%+ CET1 and improved/improving profitability; e) our bullishness on management, with CEO Scharf’s focus on growing cards and markets.
Recommendation Reviewed: October 14, 2024
Recommendation Changed: October 14, 2024
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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Fundamental View
AS OF 27 Aug 2024SBUX operates and licenses Starbucks care locations. Management has historically targeted lease-adjusted leverage of under 3x and has expressed support for the current high-BBB ratings profile.
Recent results showed headwinds from lower traffic across the company’s locations in the U.S. amid weaker consumer spending. SBUX also reported weak results in its second-largest market, China, due to increased competition in the market.
Elliott Management has taken a stake at SBUX. Specific plans have not been reported, but we see potential for Elliott to lobby for a more shareholder friendly capital allocation approach. We remain cautious around SBUX credit.
Business Description
AS OF 27 Aug 2024- SBUX is a leading coffee roaster and retailer. The company operates and licenses over 38,000 Starbucks locations worldwide where it sells premium coffee beverages as well as other specialty drinks and prepared foods. Slightly over half the locations are company operated (52%) and the rest are licensed to third party operators.
- In F2023, SBUX generated $36.0 bn in revenue and $7.3 bn in adjusted EBITDA. SBUX has three reporting segments: N. America (74% of F2023 revenue), which covers cafes in the U.S. and Canada; International (21%), which includes China, Japan, Latin America, and EMEA; and Channel Development (5.9%) which includes revenue from other branded products sold outside retail locations.
- SBUX is prioritizing International development, particularly within China. Currently, 43% of the total cafes are in the U.S., but the company is guiding to an ambitious unit expansion strategy that emphasizes unit growth across China. Long-term, SBUX is targeting 55,000 cafes globally by 2030.
Risk & Catalysts
AS OF 27 Aug 2024In response to the activist attacks, SBUX announced an unexpected change in CEO and hired Brian Niccol, a veteran of the quick service restaurant industry with a successful track record at Taco Bell and Chipotle.
Lower discretionary spending in the U.S. could continue to weigh on SBUX’s sales outlook. We view its premium-priced beverage offerings as having significant risk of consumer trade down into more value-oriented options.
SBUX faces activist pressure from both Elliott and Starboard Value. While specific plans have not been reported, we see potential for activists to call for more assertive shareholder rewards or to push for new approaches to the locations in China, where SBUX has consistently reported weak results (China locations represent ~10% of total company operating income).
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Key Metric
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CreditSight View Comment
AS OF 31 Oct 2024We maintain an Underperform view on SBUX. Recent results showed slower traffic across the portfolio of cafes amid tighter consumer spending patterns in the U.S. and an increasingly competitive coffee shop market in China. We think both headwinds could continue over the medium-term. While we do see a path for the company to keep leverage near management’s communicated sub-3x lease-adjusted target even with subdued results, we are wary of a potential shift to more shareholder-friendly capital allocation amid the current environment. To that end, SBUX confirmed that activist Elliott Management has taken a stake. We see stronger relative value at high-BBB rated McDonald’s where we like the more franchised operating model and value-oriented menu options.
Recommendation Reviewed: October 31, 2024
Recommendation Changed: May 01, 2024
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
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Fundamental View
AS OF 26 Aug 2024Goldman Sachs has had solid but mixed results in recent years, with strength in trading results particularly during periods of market volatility. Investment banking results have weakened in line with market conditions but Goldman’s market share remains strong. Investment banking appears to be rebounding in 1H24. The funding profile has improved over time with increased deposit funding.
Goldman remains well behind “Big 6” peers in diversifying its revenue base beyond its historical strong points. Wealth and Asset Management are now the most likely areas of growth in the coming years. Goldman’s results have been weighed by consumer banking exits though those costs are subsiding.
Goldman Sachs’ (A2/BBB+/A) HoldCo long-term debt ratings have stable outlooks.
Business Description
AS OF 26 Aug 2024- Goldman Sachs is now the fifth largest bank holding company in the U.S. with approximately $1.65 tn in assets as of 2Q24 and a market capitalization of $152.9 bn as of Aug 6, 2024.
- Goldman Sachs presents its activities through three business segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.
- Goldman's historical strengths include equity and FICC sales & trading, investment banking, institutional investment management including alternatives, and high net worth wealth management. It has been expanding its wealth management client base, and adding other stable fee income streams amid a sluggish capital market environment.
Risk & Catalysts
AS OF 26 Aug 2024From a fundamental standpoint, the past several years have been a mixed bag. Goldman’s foray into consumer lending was costly and ultimately did not work, diverting capital and management attention away from its core businesses and providing a meaningful drag on profitability. Management through most of the process of selling consumer-related businesses. Goldman’s performance has remained strong in its legacy areas of strength in trading and investment banking.
Goldman could participate in further M&A to achieve its long-term strategic goals, as it has in recent years with mixed results; most likely through add-on deals related to asset/wealth management.
Goldman could be impacted by the lack of liquidity in the secondary markets during periods of market turmoil, but for the most part, has been positively impacted by bouts of volatility.
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Key Metric
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CreditSight View Comment
AS OF 16 Oct 2024We maintain our Market perform recommendation for Goldman Sachs; we remain quite comfortable with the name fundamentally but see better value at money center banks as well as Morgan Stanley, given recent spread levels. Goldman should be back to a normal pace of issuance so technicals should not be quite as much of a tailwind going forward as they had been in 2023 and early 2024, though the fundamental picture continues to improve with improved capital markets conditions as well as reduced drag from exited businesses. The SCB beginning in 4Q24 rises to 6.2%, resulting in a CET1 requirement of 13.7%. Results in 3Q24 showed further momentum in the investment banking businesses and particularly strong equities activity; conditions are helping A&WM as well.
Recommendation Reviewed: October 16, 2024
Recommendation Changed: January 12, 2022
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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Fundamental View
AS OF 26 Aug 2024We view Morgan Stanley’s credit profile positively, supported by high capital levels, diversification in revenues and continued progress on building out wealth/asset management both organically and through acquisition.
Capital markets revenues were impacted by challenging conditions in 2022-23, but have rebounded nicely thus far in 2024. Wealth Management revenue growth has slowed compared to previous years but remains a solidly profitable and growing business for MS, providing stable and diversified revenues.
Morgan Stanley (A1/A-/A+) was upgraded by Moody’s to A1 on reduced risk of loss from the capital markets business in 2021. The S&P rating was upgraded to A- in May 2022.
Business Description
AS OF 26 Aug 2024- The company is now the sixth largest bank holding company by assets in the U.S. with $1.21 tn of assets as of 2Q24, and is the fifth largest by market capitalization ($150.4 bn as of Aug 7, 2024).
- Morgan Stanley maintains "significant market positions in each of its business segments," which include Institutional Securities, Wealth Management, and Investment Management.
Risk & Catalysts
AS OF 26 Aug 2024Ted Pick took over as CEO in 2024. The runner-up candidates for the job are staying with the company and Gorman is remaining as Executive Chairman, and we don’t expect major strategic changes.
Much of Morgan Stanley’s core business is tied to global macroeconomic trends and investor risk appetite. Additionally, it has significant trading risk and counterparty exposures, though such risk appears well-managed overall and is reflected in capital requirements.
Capital levels are governed by the annual DFAST process and the SCB regime. MS has typically run with capital levels at or near the highest among GSIBs given the trading losses included in the Fed’s model.
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Key Metric
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CreditSight View Comment
AS OF 17 Oct 2024We maintain our Market perform recommendation for Morgan Stanley, with our positive view of fundamentals supported by another solid quarter in 3Q24, where Morgan Stanley’s investment banking and trading results continued to improve along with market conditions. We see slightly better valuation among some of the money center banks (increasingly WFC, as well as Citi and BAC) but like MS relative to GS given similar spread levels recently. Performance rebounded in the Wealth segment from a difficult 2023.
Recommendation Reviewed: October 17, 2024
Recommendation Changed: March 14, 2016
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
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Fundamental View
AS OF 19 Aug 2024We expect T-Mobile will maintain its position as the industry leader in postpaid phone net additions, service revenue, EBITDA and FCF growth in 2024. We think the company has significant subscriber runway remaining in the suburban/rural and enterprise markets.
Adjusted net leverage (2.5x at 2Q24) is nearly half a turn lower than AT&T and Verizon. Relatively strong EBITDA growth and a modest dividend commitment results in greater financial flexibility than peers.
T-Mobile benefits from the strongest spectrum position in the industry, including an average of 181 MHz in the 2.5 GHz band, which results in better 5G network coverage than AT&T and Verizon.
Business Description
AS OF 19 Aug 2024- TMUS is the one of the top 3 U.S. wireless carriers and is owned ~50% by Deutsche Telekom (DT). On April 1, 2020, TMUS and S completed an all-stock merger, valuing S at an EV of approximately $59.7 bn.
- TMUS ended 2Q24 with ~126 mn customers, including 101 mn postpaid and 25 mn prepaid.
- TMUS reaches 330+mn POPs with its Extended Range 5G network (using the 600 MHz spectrum) and reaches 300mn customers with its Ultra Capacity 5G.
Risk & Catalysts
AS OF 19 Aug 2024With T-Mobile’s credit rating now comfortably in the mid-BBB area and leverage in the vicinity of the group’s mid-2x target area, we expect the company’s capital allocation to shift toward share buybacks.
The company has not shied away from acquisitions. T-Mobile recently acquired Mint Mobile and announced deals for US Cellular and two FTTH JVs (Lumos and MetroNet). So far, M&A has not had much impact on T-Mobile’s credit metrics, but further moves into FTTH may be received poorly by investors.
Converged wireless/broadband offers from cable operators raises the risk of pricing pressure in the mature consumer wireless market.
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Key Metric
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CreditSight View Comment
AS OF 24 Oct 2024We expect TMUS will once again lead the Big 3 in major KPIs in 2024, including high-single digit EBITDA growth and low-double digit FCF growth. We view earnings/growth visibility as higher than peers, with the outlook supported by its leading 5G mid-band coverage (over 300 million PoPs with ~200 MHz) and historical under-penetration in rural and enterprise markets. Credit metrics are best in class, with the group already below its ~2.5x net leverage target while AT&T (2.8x) and Verizon (3.0x) are still in deleveraging mode. While the industry is very focused on net leverage, TMUS stands out in terms of FCF generation and the lack of a substantial dividend obligation. To put it simply, TMUS has a cleaner growth story as a challenger and a great track record on execution.
Recommendation Reviewed: October 24, 2024
Recommendation Changed: March 18, 2021
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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Fundamental View
AS OF 29 Jul 2024Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group’s leading position will be bolstered in 2024/25 as legacy media companies rein in spending and international ambitions.
From a financial perspective, we expect Netflix will deliver ~40% EBITDA growth in 2024 driven by a mix of subscriber growth, price hikes and margin expansion.
Netflix’s financial policy is relatively conservative. While the company no longer targets $10-15 billion of gross debt, we view Netflix’s new financial policy as an evolution rather than a revolution and expect credit metrics to remain best in class.
Business Description
AS OF 29 Jul 2024- NFLX is the world's leading subscription streaming entertainment service with ~278 mn paid streaming subs in 190+ countries around the world. NFLX's programming includes original & acquired TV series, documentaries and feature films.
- NFLX began expanding internationally with the launch of services in Canada (Sep 2010), followed by LatAm (Sep 2011), and the UK and Ireland (Jan 2012). NFLX launched services in 17 more markets at a measured pace through the end of 2015 before launching in the rest of the world in Jan 2016 (ex-China, N Korea, Syria, Crimea).
- At the end of 2Q24, Netflix's regional subscriber breakdown was as follows: (1) EMEA - 94.0 mn; (2) UCAN - 84.1 mn; (3) APAC - 50.3 mn and (4) LATAM - 49.3 mn.
- Ted Sarandos and Greg Peters are Co-CEOs, with Mr. Sarandos appointed to the position in July 2020 and Mr. Peters in January 2023. Co-founder Reed Hastings was appointed as executive chairman of the Board in January 2023.
Risk & Catalysts
AS OF 29 Jul 2024Market Saturation: Netflix is highly penetrated in the US market, so future growth will become increasingly dependent on price increases, uptake of the ad tier and success on the password sharing crackdown. The recent WWE and NFL deals also opens the door to higher-priced sports programming.
Increased Competition: Several large competitors including Amazon and Apple are increasingly leaning into DTC video offerings on a global basis. Heightened competition may result in rising churn & declining gross additions for NFLX.
M&A Risk: Netflix is in the early stages of an expansion into video games and has already acquired several studios. Additionally, several legacy media companies are weakly positioned and are actively considering asset sales. We believe Netflix has no interest in linear TV assets, but could be open to a studio purchase under the right circumstances.
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Key Metric
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CreditSight View Comment
AS OF 18 Oct 2024We believe Netflix’s premium valuation is justified given the group’s leading scale, operating momentum (forecast ~30 million net adds and 40+% EBITDA growth in FY24) and credit metrics, which stand in stark contrast to the pressures facing legacy media peers. Netflix is one of the few clear winners in the industry’s transition to streaming, and we believe the group is on track to extend its leading position as legacy media companies rein in spending and international ambitions and revert to licensing library content to competitors. The company’s gross leverage is already best in class at ~1.5x, and we expect Netflix can generate ~$7 billion of FCF in FY24 with a FCF to debt ratio in the ~45% area. Netflix is also positioned to maintain its double-digit top line and profit growth in 2025.
Recommendation Reviewed: October 18, 2024
Recommendation Changed: October 20, 2022
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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Fundamental View
AS OF 27 Nov 2023- Citigroup is a solid global money center bank that has done a decent job cleaning up legacy issues and fortifying the risk profile in the wake of the GFC, though it still lags peers on several fronts including profitability.
- Citi has more geographic diversification than peers owing to its international presences, though the retail side is shrinking considerably as Citi exits most of Asia and Mexico, refocusing around a global wealth management/private bank strategy.
- Citi lags on the domestic deposit front, with less than half of the deposit base of money center peers and a much smaller physical footprint, though it has been focused on driving deposit flows the past couple of years.
Business Description
AS OF 27 Nov 2023- Citigroup ranks as the 3rd largest U.S. bank by total assets ($2.37 tn) at 3Q23 and 3rd largest by Total Equity ($210 bn).
- Citi is 4th in terms of U.S. deposits with approximately $757 bn as of 3Q23 across 665 branches (S&P Capital IQ). Given the significantly smaller branch footprint, Citi does not generally possess leading market shares in most states besides South Dakota (#1).
- Citi's major business lines include U.S. consumer (mortgages and credit cards) and retail banking, global consumer, global corporate & investment banking, and global payments. The company is in the process of exiting 13 international consumer markets, refocusing the non-US footprint around four regional hubs and combining wealth management and the private bank to drive synergies out of the hubs.
Risk & Catalysts
AS OF 27 Nov 2023- Citi is still lagging peers on profitability (both ROA and ROTCE); new CEO Fraser seems to have adopted the profitability gap as a key focus point as well, and we see Fraser’s strategic moves (e.g. int’l consumer exits) as aimed at capital optimization to improve ROE.
- While not as severe as a Wells-type situation, Citi’s regulatory mishaps introduces risks should the bank fail to show improvement in internal controls, or if another major risk management failure crops up. Our base case: Citi will be able to satisfy regulators and end up with improved infrastructure, though it will likely be a multi-year process with resultant upward cost pressures.
- Citi’s global footprint makes it more exposed to emerging markets and non-domestic economies, though pending exits of ‘riskier’ consumer loan books in Asia and Mexico should help the EM risk profile; Citi has also demonstrated an ability to unwind other riskier exposures (e.g. Russia).
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Key Metric
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CreditSight View Comment
AS OF 16 Jan 2024We are comfortable with Citi and like it for the spread value over mid-A banks and compelling carry against IG corporates. We see technical support over the next 2-3 years as Citi exits int’l consumer and reduces RWAs, in turn lowering regulatory debt needs; Banamex retail is the big remaining piece, but a 2025 event at the earliest. Citi’s lagging profitability to peers is a real differentiator, but we are constructive on CEO Fraser’s overhaul and expect (and need) to see more momentum in 2024. Citi showed no ill effects from the SVB collapse, and the largely non-US commercial deposit base is inextricably tied into the bank’s broader product/service offerings with extensive and long-dated customer relationships exemplified by stable (if more costly) deposit bases and solid NIM expansion.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: January 12, 2017
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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Fundamental View
AS OF 27 Nov 2023- Bank of America is a strong and steady credit, having dramatically improved its risk profile over the last decade and significantly closed the gap with industry bellwether(s); effective expense management has also been a demonstrated core competency.
- The company remains well diversified across business lines in lending, markets, and asset/wealth management and has shown little appetite for excessive risk-taking, exemplified in part by strong stress test performance versus peers.
Business Description
AS OF 27 Nov 2023- Bank of America ranks as the 2nd largest U.S. bank by total assets ($3.15 tn) and by total deposits ($1.88 tn) as of 3Q23.
- Bank of America ranked 2nd in terms of U.S. deposits at YE22 with approximately $1.88 tn in deposits and 3,796 branches (S&P Capital IQ) with a coast-to-coast branch presence including leading market shares in California (#1), North Carolina (#1), Texas (#2), Florida (#1), and New York (#3).
- Bank of America's major business lines include U.S. retail banking, credit cards, global corporate & investment banking, and global wealth & investment management.
Risk & Catalysts
AS OF 27 Nov 2023- Bank of America has made excellent progress generating operating efficiencies and improving profitability as the crisis-era overhangs fade further into the background; it still lags peer JPM on some measures, including capital markets, but is well positioned to capture any rebounding loan growth.
- The company is relatively more sensitive to interest rates than peers, estimating that a +100 bp parallel shift in the interest rate yield curve would increase net interest income by $3.1 bn over the next 12 months (as of 3Q23).
- Also a sector-wide concern, Bank of America is exposed to cyber threats, although it has been deploying significant resources into tech spend the past few years.
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Key Metric
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CreditSight View Comment
AS OF 16 Jan 2024Our Outperform recommendation on BAC is based on a combination of fundamental strength (consistent peer-leading stress test loss rates), spread pickup over high-quality peer banks, and attractive valuations against broader corporates. Technical support is not as strong as we see all the banks returning to more normalized issuance in 2024; positively, we think BAC is less exposed than money center peers to net new issue needs from Basel III endgame implementation. The company’s missteps on the HTM portfolio is an earnings and margin opportunity cost issue, not a fundamental one, and justified ex post by the large and stable retail deposit base demonstrated through the post-SVB failure fallout; and profitability is still healthy with solidly mid-teens ROTCE, despite the securities drag.
Recommendation Reviewed: January 16, 2024
Recommendation Changed: November 04, 2013
Who We Recommend
Bank of Philippine Islands
BDO Unibank
International Container Terminal Services Inc
How may we help you?
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If you are not yet a client, we can help you by clicking the SIGN UP button.
Fundamental View
AS OF 11 Aug 2023- We continue to have confidence in CEO Andy Jassy and the company’s long-term business for both AWS and consumer. The 2Q23 results support our view as AWS growth is stabilizing and the North America consumer segment significantly improved its GAAP operating profit. AWS customers are shifting from workload optimizations to new workload deployments, and we expect AWS to remain a profitable growth driver for the foreseeable future.
- We anticipate the North America segment to see continued profitability improvements driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. Gross leverage declined by nearly 2 ticks to 0.8x or 1.6x on a lease-adjusted basis. Also, Amazon’s equity cushion is ~$1.4 tn.
Business Description
AS OF 11 Aug 2023- Amazon is an e-commerce company which sells a wide range of its own products and those of 3rd party sellers. Amazon offers fulfillment services for 3rd party sellers (FBA) and sells cloud computing services (AWS). In 2Q23, 3rd party units were 60% of total paid units, and FBA units are a majority of 3rd party units.
- In LTM 2Q23, NA segment was 62% of sales, International was 22% of sales, and AWS was 16% of sales.
- Amazon disclosed it surpassed 200 mn Prime members in April 2021. The annual membership was increased in February 2022 from $119 to $139 in the US, although fees vary by country. In mid-2019, Amazon Prime began to transition from 2-day to 1-day shipping. Amazon Prime also offers Prime Video, streaming music, and other benefits.
- In 2006, Amazon launched AWS which remains the leader in cloud computing (IaaS/PaaS). Amazon sells its own devices (e-reader, smart speaker, streaming media player, etc.).
Risk & Catalysts
AS OF 11 Aug 2023- We think Amazon has moderate event risk as its large size (~$1.4 tn market cap) provides a buffer against the regulatory risks.
- Amazon has taken steps to improve profitability including multiple rounds of layoffs which could preempt activist investor campaigns that have become more common lately for Big Tech including GOOGL and META.
- Amazon continues to face regulatory scrutiny. The FTC is finalizing a lawsuit alleging AMZN disadvantages third-party merchants who do not use its services. The biggest risk would be a breakup, although we view that as unlikely.
- Amazon’s $14 bn acquisition of Whole Foods has shown its proclivity for large M&A, although the regulatory environment could make large deals challenging e.g., FTC scrutiny on its $8.5 bn MGM acquisition.
- Amazon repurchased $6.0 bn shares in 1H22, which were the first buybacks in 10 years, although the company has not repurchased any shares since then.
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Key Metric
AS OF 25 Jan 2024Notice: Trying to access array offset on value of type null in /home/ubuntu/wealthinsights.metrobank.com.ph/web/app/themes/mb-wealth-insights/template-parts/components/keymetrics_table.php on line 32 Notice: Trying to access array offset on value of type null in /home/ubuntu/wealthinsights.metrobank.com.ph/web/app/themes/mb-wealth-insights/template-parts/components/keymetrics_table.php on line 32 Notice: Trying to access array offset on value of type null in /home/ubuntu/wealthinsights.metrobank.com.ph/web/app/themes/mb-wealth-insights/template-parts/components/keymetrics_table.php on line 32 |
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CreditSight View Comment
AS OF 21 Dec 2023We continue to have confidence in CEO Andy Jassy and the long-term business for both AWS and consumer. The 3Q23 results support our view as AWS growth has stabilized, AWS and North America both had record profits, and International nearly reached breakeven profitability. We expect AWS to remain a profitable growth driver for the foreseeable future, and the North America segment to see improved profitability driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. We estimate gross leverage declined sharply to 0.6x or 1.4x on a lease-adjusted basis. We think Amazon should be able to address the FTC’s concerns with behavioral remedies and fines, and we view a breakup as unlikely.
Recommendation Reviewed: December 21, 2023
Recommendation Changed: December 21, 2023