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Sector: Technology Media and Telecommunications
Alibaba
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 06 Sep 2024We maintain our O/P recommendation on Alibaba (A1/A+/A+) post its largely in-line F1Q25 results. Revenues decelerated to due to a small contraction of customer management revenues; EBITDA margin declined due to higher operating losses for its international ecommerce segment. Alibaba’s FOCF fell due to higher capex on GPUs for the cloud business and one-off working capital investment. Net cash decreased (albeit still substantial at RMB 187 bn) as the company allocated idle cash to long-term fixed deposit and debt securities, and fund share repurchase. We expect topline growth to improve and EBITDA margin to stabilize over the next 6-12 months, and Alibaba to maintain a net cash position; we continue to view Alibaba as a core holding in China and Asia IG credits, and we prefer its 31.
Business Description
AS OF 06 Sep 2024- Founded in 1999, Alibaba is the largest retail commerce company in the world based on gross merchandise volume (GMV) as of 31 March 2023.
- The company's business segments comprise Taobao & Tmall Group (43% of F2Q25 revenue; China e-commerce incl. Taobao, Tmall, Taobao Deals, Taocaicai, 1688.com), International Digital Commerce (11%; incl. Lazada, AliExpress, Trendyol and Daraz), Cloud Intelligence Group (10%; incl. AliCloud, AI), logistic provider Cainiao (10%), Local Consumer Services (6%; incl. Ele.me, Amap), and Digital Media and Entertainment (2%, incl. Youku & Alibaba Pictures) and Others (18%; incl. Freshippo, Fliggy, Alibaba Health, Intelligent Information Platform, SunArt, DingTalk).
- Taobao/Tmall is Alibaba's core business and the main EBITA & cash generation unit of the group. Alibaba's annual active consumer exceeded 1 bn in June-2022.
- Alibaba had a market capitalization of RMB 1.4 tn as of 6 September 2024.
Risk & Catalysts
AS OF 06 Sep 2024While Chinese policymakers have adopted an increasingly friendly stance towards tech platforms, regulatory clampdown (e.g. anti-monopoly guidelines, data security laws, personal information protection laws) may still affect Alibaba as it increases compliance cost. There are regulatory risks given the corporate structure which uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers (ICPs).
Alibaba does not control Alipay but relies on Alipay to conduct substantially all the payment processing and escrow services on its marketplaces.
Alibaba may be subject to lawsuits for items listed on its marketplaces, which may be pirated, counterfeit, or illegal.
Intensifying competition amongst eCommerce platforms may result in slower topline growth and weaker EBITDA margins for Alibaba as its increase incentives and promotional activities to defend its market share.
Key Metrics
AS OF 06 Sep 2024| CNY BN | FY21 | FY22 | FY23 | FY24 | LTM F1Q25 |
|---|---|---|---|---|---|
| Debt to Book Cap | 12.1% | 11.6% | 12.6% | 13.3% | 16.5% |
| Debt/Total Equity | 13.8% | 13.1% | 14.4% | 15.3% | 19.7% |
| Debt/Total Assets | 8.8% | 8.3% | 9.2% | 9.7% | 11.6% |
| Gross Leverage | 0.8x | 0.9x | 0.9x | 0.9x | 1.1x |
| Interest Coverage | 39.9x | 32.2x | 29.6x | 24.0x | 22.3x |
| EBITDA Margin | 24.9% | 18.5% | 20.2% | 20.3% | 19.6% |
CreditSights View
AS OF 06 Sep 2024We maintain our O/P recommendation on Alibaba (A1/A+/A+) post its largely in-line F1Q25 results. Revenues decelerated to due to a small contraction of customer management revenues; EBITDA margin declined due to higher operating losses for its international ecommerce segment. Alibaba’s FOCF fell due to higher capex on GPUs for the cloud business and one-off working capital investment. Net cash decreased (albeit still substantial at RMB 187 bn) as the company allocated idle cash to long-term fixed deposit and debt securities, and fund share repurchase. We expect topline growth to improve and EBITDA margin to stabilize over the next 6-12 months, and Alibaba to maintain a net cash position; we continue to view Alibaba as a core holding in China and Asia IG credits, and we prefer its 31.
Recommendation Reviewed: September 06, 2024
Recommendation Changed: August 05, 2022
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Fundamental View
AS OF 13 Aug 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.3x gross leverage (pro forma for $10.5 bn bond deal) and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is going through a heavy investment cycle for both AI and the metaverse.
We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta has legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Business Description
AS OF 13 Aug 2024- Meta Platforms is the largest social networking company in the world. Meta generates substantially all of its revenue from advertising which includes Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications.
- In 2Q24, Family of Apps was 99% of revenue (98.1% from advertising and 0.9% from other) and Reality Labs was 1% of revenue. Reality Labs generated $16.7 bn in operating losses during LTM 2Q24 as the company is investing heavily in the metaverse.
- There are 3.27 bn Family Daily Active People (DAP) as of 2Q24, and the Family Average Revenue per Person (ARPP) was $11.89 quarterly in 2Q24. While US & Canada have the lowest number of users, they generate higher revenue than other regions given significantly higher ARPU. Revenue was 43% from US & Canada, 24% from Europe, 20% from Asia Pacific, and 13% from Rest of World in 2Q24.
- Meta is headquartered in Menlo Park, California. Employee headcount was 70.8k at 2Q24.
Risk & Catalysts
AS OF 13 Aug 2024In December 2020, the FTC filed a lawsuit against Meta targeting its acquisitions of Instagram and Whatsapp. If Meta is forced to unwind prior acquisitions, this would be a credit negative given reduced scale and diversification.
Meta’s business model relies almost entirely on user-generated content. As such, there are risks related to customer privacy (e.g., Cambridge Analytica data scandal in 2018) and regulatory changes (e.g., Section 230 protections).
In April 2024, the US signed into law a bill requiring a sale or ban of TikTok, although we expect legal challenges. If a ban is implemented, this would positively impact Meta and others with competing short-form video products.
In October 2022, activist Altimeter Capital wrote a letter to Zuck and Board although it was on the friendly-side of activism and some suggestions have already been implemented.
Key Metrics
AS OF 07 Feb 2024| $ mn | 2019 | 2020 | 2021 | 2022 | LTM 4Q23 |
|---|---|---|---|---|---|
| Revenue YoY % | 26.6% | 21.6% | 37.2% | (1.1%) | 15.7% |
| EBITDA | 34,562 | 46,069 | 63,882 | 49,622 | 71,955 |
| EBITDA Margin | 48.9% | 53.6% | 54.2% | 42.6% | 53.3% |
| CapEx % of Sales | 22.1% | 18.3% | 16.3% | 27.5% | 20.8% |
| Sh. Ret. % of CFO-CapEx | 20% | 27% | 116% | 152% | 46% |
| Net Debt | (54,855) | (61,954) | (47,998) | (30,815) | (47,018) |
| Gross Leverage | 0.0x | 0.0x | 0.0x | 0.2x | 0.3x |
| EV / EBITDA | 15.5x | 15.8x | 14.0x | 5.8x | 12.3x |
CreditSights View
AS OF 07 Aug 2024Meta has Aa3/AA-/NR ratings which reflects extremely strong credit metrics of 0.3x gross leverage (pro forma for $10.5 bn bond deal) and $40 bn net cash. We are encouraged by Meta’s strong advertising growth relative to peers. However, Meta is going through a heavy investment cycle for both AI and the metaverse. We continue to expect Meta to be a regular/annual issuer to fund its shareholder returns and massive investments. Longer term, we expect Meta to adhere to its previously communicated financial policy of maintaining a positive or neutral cash balance. Meta does have legal and regulatory risks notably an FTC suit that seeks to unwind its prior acquisitions of Instagram and WhatsApp.
Recommendation Reviewed: August 07, 2024
Recommendation Changed: April 18, 2024
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Search topics about wealth insights and investments.Globe Telecom
- Sector: TechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 08 Aug 2024Globe’s FY23 earnings and 1H24 earnings grew modestly, but leverage metrics have not yet improved due to a weak broadband business, sticky dividends, and still-historically high capex (even if lower YoY).
We believe credit metrics may improve only slightly in FY24 as modest EBITDA growth, lower YoY capex, and PHP 11 bn of residual tower sales closures through 2H24 are negated by potentially higher dividend payouts.
While we acknowledge the competitive pressures by new entrant DITO, we think the impact is mitigated by Globe’s still-dominant mobile market position and DITO’s slowing expansion (given its weak financials and the costly capex involved).
Weakness in the broadband business could decelerate and improve from 3Q24 onwards.
Business Description
AS OF 08 Aug 2024- Globe is a leading telecom operator in the Philippines, competing alongside its main rival PLDT in a duopoly setting.
- Globe provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- Globe operates through 2 main business segments – “Mobile Services” and “Fixed Line and Home Broadband Services”.
- Its “Mobile Services” segment offers mobile voice, mobile SMS and mobile data services to retail customers in the Philippines. These services are marketed under the “Globe Postpaid”, “Globe Prepaid” and “TM” brands.
- Its “Fixed Line and Home Broadband Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- Globe commercially launched 5G services on a small-scale basis in Jun-2019. It currently maintains 5G coverage of 96% of the National Capital Region, with over 2,000 5G sites nationwide.
- Globe maintains dominant market shares in the mobile data, voice and SMS space (FY22 revenue market share [RMS] of 52% vs PLDT 40%), but loses out to PLDT in the home broadband space (FY22 RMS of 28%-30% vs PLDT 48%-50%).
- Globe is largely owned by two established corporate groups – Ayala Corporation (~47 stake) and Singtel (~43% stake).
Risk & Catalysts
AS OF 08 Aug 2024Globe faces mounting competitive pressures from new mobile entrant DITO and incumbent broadband competitor PLDT.
Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at Globe’s market share and restrain recoveries in average revenues per user (ARPU).
Globe incurs significant capex that has pressurized its leverage metrics and free cash flows. That said, capex should meaningfully decline ahead in line with management guidance (FY24E capex ~22% YoY lower than FY23A capex).
Consistent dividend payouts could worsen Globe’s already negative free cash flows; Globe recently raised the upper end of its dividend policy from 75% to 90% of net income, suggesting an increased skew to shareholder-friendly actions.
Key Metrics
AS OF 08 Aug 2024| PHP bn | FY21 | FY22 | FY23 | 1H23 | 1H24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 69.4% | 67.5% | 69.7% | 69.1% | 69.5% |
| Net Debt to Book Cap | 63.0% | 63.7% | 66.6% | 64.2% | 66.1% |
| Debt/Total Equity | 227.2% | 208.1% | 230.5% | 224.0% | 227.6% |
| Debt/Total Assets | 56.7% | 57.1% | 60.3% | 58.2% | 60.3% |
| Gross Leverage | 3.3x | 3.9x | 4.3x | 4.4x | 4.3x |
| Net Leverage | 3.0x | 3.7x | 4.1x | 4.0x | 4.1x |
| Interest Coverage | 7.6x | 5.9x | 4.6x | 5.0x | 4.4x |
| EBITDA Margin | 46.7% | 46.7% | 47.7% | 47.7% | 49.9% |
CreditSights View
AS OF 08 Aug 2024We upgrade Globe to Market perform from Underperform. Globe Jul-2030 trades 28 bp wider than PLDT Jan-2031; we see fair value at 30-35 bp wider given Globe’s poorer net leverage, unrated status, and poorer free cash flows that outweigh its arguably stronger shareholder backing from Singtel and Ayala Corporation. We think Globe’s c.2026 perp trades fairly. We do not prefer its Jul-2035 that trades just 10 bp wider than its Jul-2030. We expect Globe to improve its net leverage by only slightly in FY24 as lower capex and residual ~PHP 11 bn of tower sales closures are offset by a continued weak broadband business and sticky dividends. Globe also recently revised its dividend policy to 60%-90% of PAT from 60%-75% previously, suggesting an increased skew towards shareholder-friendly actions.
Recommendation Reviewed: August 08, 2024
Recommendation Changed: June 18, 2024
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Search topics about wealth insights and investments.Tencent
- Sector: Technology Media and Telecommunications
- Sub Sector: Technology
- Country: China
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Fundamental View
AS OF 28 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet.
We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Business Description
AS OF 28 May 2024- Founded in November 1998, Tencent is a leading provider of Internet value added services in China. Since its establishment, Tencent has ventured into instant messaging, social networking, online payments, digital entertainment, and PC and smartphone gaming. Most recently, it has also forayed into high-tech areas such as artificial intelligence, and cloud computing.
- Tencent's leading Internet platforms in China include Weixin/WeChat (online messaging), QQ Instant Messenger (online messaging), Tencent Games (gaming), Tencent Video/Weixin Video Accounts (video platforms), WeChat Pay (payments), and Tencent Cloud. The combined monthly average users (MAU) of Weixin and Wechat reached 1.36 bn as of 31 March 2023.
- In 1Q24, 49% of revenues came from Value Added Services (which consist of Domestic Games, International Games, and Social Networks), 33% came from FinTech and Business Services (e.g. commercial payments and cloud), 17% from Online Advertising and 1% from Others.
- Tencent is currently primarily listed on the Hong Kong Stock Exchange, with a market capitalization of HKD 3.6 tn as of 28 May 2024.
Risk & Catalysts
AS OF 28 May 2024While Chinese regulators have adopted a more friendly stance towards tech companies, any regulatory clampdowns abroad and domestically (e.g. antitrust rules, data security, personal information protection laws) may affect Tencent’s business. Tencent’s gaming, music streaming, and online payment units are among those that have come under regulatory scrutiny in the past.
Tencent uses variable interest entities (VIEs) to circumvent China’s restrictions on foreign ownership of Internet Content Providers, which poses regulatory risks. Specifically, VIE transactions involving “change in control” will be subject to antitrust regulatory processes.
Key Metrics
AS OF 28 May 2024| RMB bn | FY20 | FY21 | FY22 | FY23 | LTM 1Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 25.2% | 27.0% | 31.4% | 29.8% | 29.0% |
| Net Debt to Book Cap | 4.0% | 6.0% | 8.5% | 1.0% | n/m |
| Debt/Total Equity | 33.7% | 36.9% | 45.9% | 42.5% | 40.8% |
| Debt/Total Assets | 19.7% | 20.1% | 22.8% | 23.5% | 22.7% |
| Gross Leverage | 1.4x | 1.7x | 1.9x | 1.6x | 1.5x |
| Net Leverage | 0.2x | 0.4x | 0.5x | 0.1x | n/m |
| Interest Coverage | 24.8x | 24.7x | 19.0x | 19.9x | 20.5x |
| EBITDA Margin | 38.3% | 34.9% | 34.3% | 38.9% | 40.2% |
CreditSights View
AS OF 15 May 2024We maintain our Outperform recommendation on Tencent (A1/A+/A+) post its strong 1Q24 results; Topline growth in 1Q24 was ahead of our expectations, while EBITDA margin and debt metrics improved. Tencent also turned to a net cash position in 1Q24 on the back of stable FOCF. We see positive earnings catalysts over the next 12 month as the company delivers better domestic gaming revenues, further improve EBITDA margin, and maintain a rock solid balance sheet. We continue to see value in Tencent compared to other A-rated China tech, Asia quasi-sovereigns and US tech. We like the 7-20Y part of Tencent curve (38,41) as a core holding for investors looking to add duration in the Asia credit space.
Recommendation Reviewed: May 15, 2024
Recommendation Changed: August 18, 2022
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Search topics about wealth insights and investments.PLDT
- Sector: Media and TelecommunicationsTechnologyTechnology Media and Telecommunications
- Sub Sector: Telecommunications
- Country: Philippines
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Fundamental View
AS OF 10 May 2024PLDT’s FY23 and 1Q24 results were stable as expected; we see a modestly improving FY24 credit outlook aided by resilient EBITDA growth and residual PHP 15 bn of tower sales, which could offset persisting high capex and dividends.
A potential stake sale of the data center business could drive further deleveraging.
While the spillover of a PHP 33 bn capex overrun to FY24-FY25 could weigh on free cash flows, we draw mild comfort that it was likely not due to fraud but rather a management misstep.
Business Description
AS OF 10 May 2024- PLDT is a leading telecom operator in the Philippines, competing alongside its main rival Globe Telecom in a predominant duopoly.
- PLDT provides 2G/3G/4G mobile, fixed-line, broadband, enterprise data, and other digital services to retail and corporate customers.
- PLDT operates through 2 main business segments – “Wireless Services” and “Fixed Line Services”.
- Its “Wireless” segment offers mobile voice, mobile SMS, mobile data and mobile broadband services to retail customers in the Philippines. These services are marketed under the “Smart Postpaid”, “Smart Prepaid”, "Sun Postpaid" and “TNT Prepaid” brands.
- Its “Fixed Line Services” segment provides fixed line voice, corporate data and home broadband services to retail and corporate customers in the Philippines.
- PLDT commercially launched 5G services on a small-scale basis in Jul-2020. It currently has over 3,000 5G sites nationwide.
- PLDT maintains dominant market shares in the mobile data, voice and SMS space (FY21 revenue market share [RMS] of 47% vs Globe 52%), the fixed line voice space (FY21 RMS of 90% vs Globe 10%), and the home broadband space (FY21 RMS of 45% vs Globe 31%).
- PLDT is backed by three established corporate groups, namely First Pacific (~15% stake), NTT Corporation (~12% stake) and JG Summit Holdings (~7% stake).
Risk & Catalysts
AS OF 10 May 2024Aggressive expansion by new entrant DITO over the next 2-4 years could chew away at PLDT’s market share and restrain recoveries in average revenues per user (ARPU).
PLDT incurs significant capex that has restrained improvements in its leverage metrics and free cash flows. This is worsened by a recent capex overrun that has induced mild corporate governance uncertainties (though these have eased in recent months).
Consistently high dividend payouts could worsen PLDT’s already negative free cash flows.
PLDT is exposed to $/PHP depreciation risks ($300 mn 2050 bond is fully unhedged).
Key Metrics
AS OF 10 May 2024| PHP bn | FY21 | FY22 | FY23 | 1Q23 | 1Q24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 68.3% | 71.9% | 73.3% | 72.2% | 74.1% |
| Net Debt to Book Cap | 62.3% | 65.7% | 69.3% | 65.7% | 70.7% |
| Debt/Total Equity | 215.2% | 256.2% | 273.9% | 260.3% | 286.6% |
| Debt/Total Assets | 43.8% | 46.8% | 49.6% | 46.4% | 49.0% |
| Gross Leverage | 2.8x | 2.9x | 2.9x | 2.8x | 2.9x |
| Net Leverage | 2.6x | 2.7x | 2.8x | 2.5x | 2.7x |
| Interest Coverage | 8.1x | 7.4x | 6.5x | 7.4x | 6.4x |
| EBITDA Margin | 50.7% | 48.7% | 49.1% | 48.6% | 52.0% |
CreditSights View
AS OF 18 Jun 2024We have a Market perform recommendation on PLDT. PLDT’s Jan-2031 trades 33 bp tighter than Globe’s Jul-2030, in line with our fair spread differential of 30-35 bp tighter as PLDT’s IG rated status, stronger net leverage, stronger FCFs, and greater exposure to the stabler broadband sector could offset its weaker shareholder backing. We do not like the Jun-2050 that trades just 9 bp wider than the Jul-2030. We are comfortable with PLDT’s sturdy credit profile aided by a resilient broadband business and tower sales (PHP 15 bn to close in FY24), cushioning high capex and dividends. Corporate governance fears have also eased post its capex overrun in end-2022. We are watchful of strong competition in the mobile space due to DITO’s ramp up.
Recommendation Reviewed: June 18, 2024
Recommendation Changed: May 31, 2022
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Search topics about wealth insights and investments.T-Mobile US
- Sector: Technology Media and Telecommunications
- Sub Sector: Telecommunications
- Region: US
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Fundamental View
AS OF 15 Feb 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 (2.6x at 4Q23) 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 15 Feb 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 4Q23 with ~120 mn customers, including 98 mn postpaid and 22 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 15 Feb 2024Converged wireless/broadband offers from cable operators and an upstart competitor in the form of DISH raises the risk of pricing pressure in the mature consumer wireless market.
With 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 expressed an interest in fiber assets. At present, T-Mobile is focused on an “asset-lite” fiber strategy, but there is some concern the group could eventually deploy more capital to this area (potentially via M&A).
Key Metrics
AS OF 15 Feb 2024| Baa2/BBB/BBB+ | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Revenue | 45,151 | 68,397 | 80,118 | 79,571 | 78,558 |
| Organic Revenue Growth | 4.3% | 5.8% | 7.3% | (0.7%) | (1.3%) |
| EBITDA | 13,536 | 24,557 | 26,924 | 27,821 | 29,428 |
| Adj. EBITDA Growth | 9.8% | 4.3% | (64.0%) | 33.9% | 5.8% |
| Adj. EBITDA Margin | 30.0% | 35.9% | 33.6% | 35.0% | 37.5% |
| CapEx % of Sales | 13.1% | 16.1% | 15.4% | 17.6% | 12.5% |
| Total Debt | 29,508 | 76,660 | 79,574 | 78,425 | 78,425 |
| Net Debt | 27,980 | 66,275 | 72,943 | 73,918 | 73,290 |
| Gross Leverage | 2.2x | 3.5x | 3.4x | 3.0x | 2.7x |
| Net Leverage | 2.1x | 3.0x | 3.1x | 2.8x | 2.5x |
| Interest Coverage | 11.9x | 9.0x | 7.2x | 8.0x | 8.3x |
| FCF as % of Debt | 22.0% | 14.1% | 13.7% | 13.2% | 19.2% |
CreditSights View
AS OF 28 May 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 at its ~2.5x net leverage target while AT&T (2.9x) 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: May 28, 2024
Recommendation Changed: March 18, 2021
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Search topics about wealth insights and investments.Amazon.com
- Sector: ConsumerTechnology Media and Telecommunications
- Sub Sector: Retail/GrocersTechnology
- Region: US
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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.
Key Metrics
AS OF 11 Aug 2023| $ mn | 2019 | 2020 | 2021 | 2022 | LTM 2Q23 |
|---|---|---|---|---|---|
| Revenue YoY % | 20.5% | 37.6% | 21.7% | 9.4% | 10.7% |
| EBITDA | 43,394 | 57,284 | 71,994 | 74,593 | 87,648 |
| EBITDA Margin | 15.5% | 14.8% | 15.3% | 14.5% | 16.3% |
| CapEx % of Sales | 4.5% | 9.1% | 11.8% | 11.3% | 10.0% |
| Sh. Ret. % of CFO-CapEx | 0% | 0% | 0% | (52%) | 0% |
| Net Debt | (30,201) | (50,497) | (44,771) | 7,316 | 7,902 |
| Gross Leverage | 0.6x | 0.6x | 0.7x | 1.0x | 0.8x |
| EV / EBITDA | 20.8x | 28.3x | 23.3x | 11.7x | 15.6x |
CreditSights View
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
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