Microsoft, Amazon fall down, now it's Airbnb & Uber's turn to be the kings?

In the macro environment outlined by Dolphin Analyst, what are the investment opportunities and performance prospects for Microsoft, Amazon, Airbnb, and Uber, two giants in the B2B industry and two small leading companies in the C2C travel service industry, respectively? Dolphin Analyst came to the following core conclusions:

Many enterprises have made excessive and premature capex investments during the period of large-scale water release due to the pandemic. Therefore, after the monetary tightening, the revenue growth of B2B companies providing services has slowed down rapidly. In contrast, due to the strong growth of resident consumption and services, Airbnb and Uber have better revenue prospects.
Giants have invested too much during the pandemic and need some time to digest or cut off excessive "production capacity"; on the other hand, C2C companies have entered a period of continuous profit release due to the "lightening load" after the pandemic and are expected to continue to do so. Therefore, the profit growth prospects of vertical platforms will also be better.
Therefore, the two vertical platforms are in a "golden period" of double revenue and profit growth superiority. However, a good fundamental trend does not necessarily mean a good investment opportunity. According to Dolphin Analyst's estimation, under the neutral expectation that the U.S. economy will maintain resilience, whether it is Microsoft among giants or two vertical platforms, their current prices have fully reflected Dolphin's performance expectations of them. Only Amazon is in the depth of undervaluation. If it is expected that the U.S. economy will eventually fall into recession in 2024, Dolphin Analyst estimates that the valuation of Microsoft, Uber, and Airbnb will generally have a 20% downside from the current price. Amazon's current price is already close to Dolphin Analyst's pessimistic expectations. Here are the details: I. How will the key beta factors played be affected? Dolphin Analyst first summarizes the key judgments that will affect the trend of the U.S. economy in 2023, and then uses this as the logical cornerstone to develop a value judgment of the sub-industries and giants of the U.S. platform internet sector.
Under the double impact of inflation and interest rate hikes in 2022, the savings of US residents have returned to the pre-epidemic level, and excess savings have been basically released (excluding accumulated capital from financial management, stocks and other assets). After the cost of borrowing rises, the speed at which US residents borrow to consume is also rapidly slowing down (the new amount of housing loans, which account for 71% of the outstanding balance, have dropped more than 60% from the peak and returned to the level of 2019). Therefore, the trend of consumption spending after the basic sources of funds promoting consumption- debt plus leverage and excess deposits have been released-will basically depend on the income growth of US residents during the period. Will US residents' income growth (especially wage income) continue to maintain a high rate of growth? This question can be equivalent to whether the tight job market will ease rapidly. The Dolphin Analyst thinks that it is highly unlikely. There are two reasons, first, among the current 3.5 million job vacancies in the United States, about 170 vacancies are caused by the overall decline in the total labor force after the epidemic, and the recovery of labor supply cannot be achieved overnight.

The second reason is that the demand for new job positions is mainly concentrated in the three sectors of business services, social work and healthcare, and catering and accommodation (with about 1.7 million job demands more than before the epidemic). The latter two are lean-demand industries related to residents' daily consumption, only the human resource demand in business services has greater elasticity, and most of the programers and administrative support personnel recently laid off by large enterprises belong to this category.

Combining the two points mentioned above, the Dolphin Analyst believes that the overall labor gap in the United States is difficult to dissipate quickly (especially in blue-collar industries), and the shortage of labor and stable wage growth will continue.

Based on the two points mentioned above, it can be deduced that the salary of US residents will continue to increase steadily, supporting the resilience of consumer spending. As 70% of the contribution of US GDP comes from consumer spending, it means that the economic growth of the United States is unlikely to fall into actual recession, even though it is likely to continue to slow down.

2. Giants vs. Vertical Industry Unicorns, Who Has the Upper Hand?

2.1 Residents' Consumption is Resilient, Corporate Investment Needs to Repay Debt

In fact, although the quarterly GDP growth rate in the United States is indeed continuing to decline, and the year-on-year growth rate of 4Q 2022 is already below 1%, looking only at US residents' consumption, it is still showing fairly robust growth.

As can be seen from the figure below, the low point of US consumer spending growth rate within 2022 is still 5%, far higher than the lowest growth rates during the actual recession periods in the US in 2008, 2015, and 2020. Moreover, in January this year, US residents' spending and per capita income were still accelerating on a month-on-month basis, and the consumer confidence index has also been rising recently. Therefore, the overall consumption of US residents is showing no signs of recession, but is thriving instead.

Not only in macro data, comparing Airbnb+Uber and Microsoft+AWS, the revenue growth of to-C services is not only far ahead of to-B IT services in absolute growth rate (of course, the revenue scale of the latter is much higher than the former, and there is a base number issue) - from the trend, the revenue growth of to-C services is even accelerating in the fourth quarter, while the to-B revenue growth is continuously decreasing. **

So why is the trend of "to C" stronger than "to B"? The reason is very clear. Firstly, the overall consumption expenditure of US residents is very robust, and the growth rate in the past 1-2 months is also on an upward turning point. However, many companies have made excessive and forward-looking capex investments during the pandemic period, so after monetary tightening, they generally started to lay off employees and reduce capex, and there was no incremental demand to boost the revenue growth of "to B" companies of service enterprises. Dolphin Analyst has made a detailed analysis in the previous summary "Stripping Off the 'Pandemic Fat', Who is Swimming Naked and Who is Laughing?".

Therefore, the first conclusion of this article by Dolphin Analyst is that, unlike the strong recession atmosphere shown in the financial reports of Microsoft, Amazon, Google and other service enterprise users, consumer-oriented enterprises (especially service enterprises) have a relative growth advantage, and this advantage will continue in the medium term.

2.2, Giants talk about reducing costs and increasing efficiency, and vertical platforms make a fortune with their eyes closed

However, the giants (AMZN+MSFT) and vertical platforms (Airbnb+Uber) covered by Dolphin Analyst not only have different outlooks on revenue growth, but also will be in different cost investment cycles in the present and the future due to their different experiences during the pandemic period.

According to the "pre-pandemic", "during the pandemic", and "post-pandemic" periods, it can be clearly seen that there is a distinct difference in the relative relationship between revenue growth and cost growth between giants and vertical platforms in the three different time stages.

(1) Pre-pandemic era: In this stage, the revenue growth and cost growth of giants are basically a straight line and perfectly matched, with relatively stable profit margins; while the cost growth of small vertical heads in the fast-growing period is far higher than the revenue growth, consistent with the characteristics of growth-oriented companies that pursue scale and do not pursue profits;

(2) During the pandemic: Benefiting from the online transformation of economic activities caused by lockdowns and the large amount of money released, the revenue growth of giants has significantly increased, while the growth of costs has steadily declined, reaching the golden period of simultaneous growth in scale and profit margins. However, as vertical platforms rely on offline performance, their revenue scale plummeted (down 20%~40% YoY), and cost investment was also rapidly cut to match revenue, which was a difficult period.

(3) Post-pandemic era: Due to being too optimistic and over-investment during the "golden period" of the pandemic, giants are facing a dilemma of slowing revenue and inertia soaring costs (also affected by inflation), leading to a dual decline in revenue and profit margins. During the pandemic, Dolphin scaled down personnel and expenses on their platform. However, they quickly recovered their revenue post-pandemic while continuing to control expense growth, resulting in double increases of revenue and profit margins.

Dolphin Analyst's second observation is that major players' excessive investment during the pandemic may take time to digest or cut down on overcapacity. Conversely, two niche companies have entered a cycle of continuous profit release after lightening their load during the pandemic. Therefore, the prospects of profit growth for niche platforms are better.

Looking ahead to 2023 and beyond, based on our review of the current macroeconomic situation in the US, as well as the different revenue and profit cycles of To B leading and to C niche companies, what is Dolphin Analyst's outlook and preference for the overall performance of the four companies mentioned earlier?

3.1, Neutral Path: Longbride Dolphin Analyst believes that the most likely scenario at present is that "resilient consumer spending will support the US economy slowing down, particularly in the service sector." Due to the still-tight employment market, deflation will be more tumultuous than expected and delayed rate cuts will limit the potential for a significant capital market valuation increase.

As US companies digest excessive pandemic investments, consumer spending will ultimately transmit to enterprises, thereby pushing for the recovery of investments in IT, etc.

Regarding the performance of the aforementioned companies, niche platforms' revenue growth rate will most likely remain stable or slightly slow down, while reasonable investment growth will improve the profit margin trend.

To B giants will experience significant growth decline for a few quarters, with profit margins possibly falling during the period. Afterwards, as companies return to investment, inflation and a strong dollar will slowly fall, and these giants' revenue and profit margins will also recover.

In this case, focus on the companies' performance under normal circumstances and enter the market at a reasonable and appropriate valuation.

3.2, Pessimistic Path: In this scenario, sustained high interest rates and the mutual transmission of layoffs among companies ultimately reverse the shortage of labor in the US. Expectations of stable income growth for consumers disappear, causing significant declines in consumer spending and leading the US economy into a substantial recession. However, this scenario is expected to happen after 2024.

Under this scenario, To B and To C services are optional, and the revenue growth rates of both giant and niche platforms will significantly decline or even turn negative. However, companies will also exercise stricter cost control, and profit margins may not decrease significantly. If this situation comes true, the market may significantly decline, and one can only enter the market with peace of mind when the company's stock price enters the deep value zone. However, the achievement of the goal of rising unemployment and falling inflation may prompt the Fed to cut interest rates ahead of schedule. At this time, some companies that mainly look at long-term prospects and valuations, but are not sensitive to actual performance, may perform well.

However, good companies and good performance expectations do not equal good investment opportunities. Therefore, in the afternoon, Dolphin Analyst will test the reasonable valuation range of four companies based on the above two different scenario assumptions for everyone to refer to.

IV. Valuation Calculation Under Different Companies and Scenarios

4.1 Microsoft: Big Brother's Confidence Unchanged, Waiting for Cycle Reversion

Although Microsoft, a company with extremely resilient past performance, has also experienced significantly slowed revenue growth and even negative profit growth in recent financial reports. However, as analyzed in our financial report review, "Steadfast Azure cannot save Microsoft in the cycle", the main reasons behind the ugly performance of Microsoft are as follows:

(1) The most core issue is that after a large number of enterprises reduce their investment in IT and other aspects, the company's cloud service fees and productivity tool sectors have rapidly slowed down due to shrinking demands.

(2) The old PC-related business, due to the overdrawn demand for PC shipments during the epidemic period and semiconductor capacity issues, has experienced a greater decline in demand.

(3) Continuous interest rate hikes and strong dollar have caused Microsoft, which has nearly half of its revenue overseas, to be severely affected by exchange rate fluctuations, and inflation has also caused excessive cost increases.

From this, we can clearly see that Microsoft's performance issues are basically all due to the cycle impact of fluctuations in enterprise IT and PC demand, as well as macro factors such as inflation and exchange rates. However, the market position of the company in operating systems, office software, cloud services, and the cloud-based trend represented by various "365" products remain unchanged.

In our neutral scenario, resilient resident consumption will inevitably prompt enterprises to reinvest in IT, and with the decline of the strong dollar, exchange rates will also become a favorable factor. Therefore, as long as we wait for the cycle to reverse, the bottoming out and rebounding of Microsoft's performance will also be a deterministic event.

In this case, we expect that Microsoft's revenue growth will quickly return to the long-term growth trend after slowing down (slightly above 5% growth rate) at the end of the 2023 fiscal year (the second quarter) to the first half of the 2024 fiscal year.

In addition, due to the company's recent measures to lay off employees and control costs, we expect that the rebound node and intensity of operating profit growth will be earlier than that of revenue. Starting from the 2025 fiscal year, as the company's revenue and cost growth rates realign and scale efficiency returns, profit growth will approach and slightly exceed revenue growth.

Based on the assumptions about Microsoft's performance and the expectation that the Federal Reserve will not cut interest rates in the near future, the Dolphin Analyst still uses a risk-free rate of 3.5%, a WACC of 9.2%, and a perpetual growth rate of 2.5% to estimate the fair value of Microsoft's neutral expectation at $268 using the DCF model, which represents a 7% upside from the current market price. Therefore, it seems that there is no favorable entry point with a safety margin for Microsoft's current valuation.

Perhaps the reason is that the recent market enthusiasm for ChatGPT is high, but from the Dolphin Analyst's personal experience, it may take some time for ChatGPT to effectively and accurately assist users in data collection or processing. Therefore, the Dolphin Analyst did not take into account the possible impact of ChatGPT on revenue expectations and expenses for advertising and office businesses in the current model.

Under the expectation of continued high interest rates ultimately crushing the US economy, assuming that the revenue growth rate for the 2024 fiscal year will further deteriorate, we predict that the growth rate for each business will be zero for the 2024 fiscal year, and the cost control will be stronger while the profit growth rate remains higher than the income.

In this pessimistic scenario, we do not use the DCF model to measure long-term growth, but directly use the P/E valuation for the lowest performance year of 2024. Considering Microsoft's leading position and the corresponding profit CAGR for each sector, we calculated a pessimistic valuation of $202 per share for Microsoft. Therefore, even if the macroeconomic situation of US stocks deteriorates, the opportunity will gradually outweigh the risk when the stock price falls to around $200.

Reference for Microsoft's historical research:

January 25, 2023 phone call "Inevitable Slowdown (Microsoft Phone Call Minutes)"

January 25, 2023 financial report review "Azure cannot save Microsoft in the cycle of decline"

October 26, 2022 phone call "Can Microsoft safely navigate out of the economic downturn?" On October 26, 2022, a review of the financial report "No one can be immune to the cycle, Microsoft can't hold on" was published on Dolphin. On July 27, 2022, a conference call on the 23rd fiscal year performance of Microsoft was held, and the summary was posted online. On the same day, a review of Microsoft's financial report "Microsoft: Harder Confidence Under a Soft Paralysis" was published. On April 27, 2022, a review of the financial report "Steadfast Microsoft is the strongest pillar of the US stock market" was posted on Longbridge. On the same day, a conference call of the third quarter on "Microsoft's journey is the real ocean of stars" was held. In February 2022, an article titled "Don't just look at Microsoft's disappointing expectations, having extra capacity is really the lord" was published. On January 26, 2022, a telephone conference on "Nadella: "Microsoft's strength lies in being able to anticipate trends before consensus"" was held. On the same day, a review of the financial report "Microsoft is still reliable without exaggeration" was published.

4.2 Amazon: Is the world's number one e-commerce not worth a reasonable valuation?

Amazon's problem is similar to Microsoft's, but the problem of over-expansion in this round of cycles, which includes heavy asset retail business, is more serious, which has a greater impact on the company's profitability and valuation. Looking at the comparison of income, profit, capex and other indicators of US giants before and after the epidemic in the figure below, it can be seen that although Amazon's revenue scale has increased the most (1.8 times) from 2022 to 2019, its capex has soared by 4.6 times. Among the giants, Amazon's level of investment is the most exaggerated. Therefore, Amazon's operating profit margin in 2022 was only 46% before the epidemic, which is also the most significant decline in profits among the giants. It can be seen that excessive investment has a great impact on the company's performance.

The rapid decline in the profit margin of the company's retail business, which will start to turn negative even in 2022, is the biggest problem. However, beyond the short-term problems caused by the company's excessive investment, we are concerned whether Amazon's leadership and competitive position in the US and global e-commerce industry have been substantially affected? Dolphin Analyst believes the answer is no.

It can even be said that due to Amazon's improvement in delivery capacity and timeliness, as well as the significant enrichment of Prime membership benefits, the company's leading position in the e-commerce platform is strengthening. Therefore, as long as a long-term perspective is taken, it is almost certain that the retail business profit margin will be restored to the pre-pandemic level after the company proactively reduces investment or excess revenue growth is passively digested.

Moreover, due to the increase in high-profit income such as 3P business and membership subscription services, and the further improvement of scale effects, it is also a high probability event that the profit margin of the retail sector will exceed the previous high.

Therefore, under the neutral scenario, US resident retail spending will continue to be strong, and demand for cloud services will also rebound after a few quarters of lagging. Meanwhile, Amazon's retail sector profit margin will rapidly rebound from the 24th fiscal year, and then exceed the pre-pandemic level, reaching above 3% (which is still relatively low in absolute terms).

Based on the neutral expectation for the company's performance and still using 3.5% as the risk-free return, and given the large fluctuations in the company's performance, with a WACC of 10%, it is estimated that Amazon's reasonable valuation per share is $141, which is 50% higher than the current closing price. It can be seen that the company is currently in a deeply undervalued zone. Once there are signs of a reversal in the company's profit margin or revenue growth, the stock price may rise significantly.

In the pessimistic scenario, we also expect revenue growth for the two major sectors to plummet, but the pace of profit margin improvement in the retail sector will advance and turn positive directly within 2023.

At the same time, in terms of valuation method, we only adopt SOTP valuation based on profit. The retail sector is given a 20x PE after entering a steady state of profit in 2026, while the cloud business is given a 25x PE based on the worst performance of profit margin in 2023. The pessimistic valuation of the company is estimated to be $87.

Dolphin Analyst believes that the current valuation of Longbridge is already quite safe, as evidenced by the price of $94 per share, and it is a good opportunity for long-term investment if the potential fluctuation of Longbridge's revenue growth can be tolerated.

Amazon Research:

Earnings Season

February 3, 2023 Conference Call "Amazon: Managing Costs while Protecting the Future"

February 3, 2023 Earnings Report Review "Without Bezos, Does Amazon Still Have a Future?"

October 28, 2022 Conference Call "Amazon: Macroeconomic Uncertainty is the Biggest Risk (Conference Call Summary)"

October 28, 2022 Earnings Report Review "Behind Amazon's "Garbage" Performance: "Two Crimes" and "One Pot""

July 29, 2022 Conference Call "Capital Investment Will Continue to Grow, but Amazon Will Be More Cautious (Conference Call Summary)"

July 29, 2022 Earnings Report Review "Iron-fisted Downsizing of 100,000 Troops, Amazon Finally "Bounces Back""

April 29, 2022 Conference Call "Even US Giants Discuss Cost Reduction and Efficiency Improvement: Amazon Conference Call Summary"

April 29, 2022 Earnings Report Review "Inflation "Eats Up" Profits, This Time AWS Can't Save Amazon"

February 4, 2022 Conference Call "Market Fluctuations, Amazon on Its Own Path (Conference Call Summary)" On February 4th, 2022, commentary on the financial report: "AWS saves Amazon from the storm" (https://longbridgeapp.com/news/55096796)

In-depth analysis:

On February 15th, 2022: "Decreased revenue and profits? Not scary for Amazon with the support of AWS" (https://longbridgeapp.com/news/55770002)

On December 3rd, 2021: "Why is Amazon more popular than Alibaba, even though they both make no profit?" (https://longbridgeapp.com/news/51401756)

4.3 Uber & Airbnb: The dawn of small industry leader?

Based on the analysis above, it can be seen that these two small industry platforms focusing on consumer travel are expected to have steady revenue growth and gradually improving profit margins from a fundamental standpoint. This "golden period" is relatively clear in logic.

However, for these two companies that are just hovering around the break-even point, it is difficult to predict their stable-state profit margin and provide a reasonable valuation estimation based on it. Therefore, Dolphin Analyst believes that investing in these two companies requires close monitoring of their actual performance and the difference between expectations.

As such, Dolphin Analyst's valuation estimation of these two companies should not be seen as a target price, but more of a benchmark for comparison. By comparing the difference between actual company performance and Dolphin Analyst's expectations, the company's valuation can be viewed dynamically.

Under neutral circumstances, due to the overall strong consumer spending (especially services). At the same time as companies gradually cancel their Work From Home policies to improve efficiency, Airbnb's management team has also stated that demand for business travel is also rapidly recovering.

Therefore, we believe that both Uber, which provides taxi services and delivery, and Airbnb, which provides accommodation, will continue to have strong demand and revenue growth in 2023. The key difference is in the judgement of long-term profitability.

(1) For Uber, Dolphin Analyst expects the overall operating profit margin to reach more than 9% by 2027. Actually, due to the fact that both ride-hailing services and delivery lack performance-based effects, compared to DiDi's profit margin of only low single digits % and Meituan's thin profit margin for delivery business including performance costs, Dolphin Analyst believes that the current profit margin expectations are not low.

Based on the above performance forecast, we have calculated Uber's current fair value at $30 using the DCF model. Since the current market price of $29 already reflects this valuation, Dolphin Analyst believes that the market has already fully priced in Uber's valuation expectations. Therefore, the stock price is only likely to continue to rise if the company's actual performance exceeds expectations.

In a pessimistic scenario, the U.S. economy may enter a substantial recession between late 2023 and 2024, and in this situation, demand for optional travel and delivery services may actually decline even faster. Under these circumstances, we expect the company's revenue growth to slow significantly to 6.9% in 2024.

As a precautionary measure, we have reduced the long-term operating profit margin to around 6%. Therefore, based on our pessimistic expectations and using the same DCF model, the fair value of Uber is calculated to be $24, which represents a downside potential of 19% from the current price. This may be a safer entry point.

Previous research on Uber:

Financial Report

February 9, 2023 Conference Call - "Can Uber Continue to Grow While Cutting Costs?"

February 8, 2023 financial report review - "Can the American "Di Di" Outperform Big and Strong Companies?"

November 2, 2022 Conference Call - "Uber Believes That Travel Demand Remains Strong, with a Focus on Improving User Stickiness and Habits"

November 2, 2022 financial report review - "Uber Can Make Money Even Without Growth, and the Market is Buying It?" Deep Dive

November 21, 2022 "What lies ahead for Uber after enduring the ups and downs of the epidemic?" (https://longbridgeapp.com/en/topics/3672733)"

October 14, 2022 "Behind the fortunes of Uber during the epidemic and inflation" (https://longbridgeapp.com/topics/3533962)"

(2) For Airbnb, under neutral circumstances Dolphin Analyst also expects the platform's room night volume to steadily increase, but ADR will decrease due to housing structures shifting towards lower-priced products (urban, international).

Conversion rates steadily increase, and profitability will ultimately reach 31% or higher in 2026, matching the current profitability level of industry leader Booking.

Based on the performance predictions mentioned above, also using a risk-free rate of 3.5% and a discount rate of 10.9%, Dolphin Analyst predicts Airbnb's fair stock price under neutral circumstances to be $128 per share through the DCF model. Relative to the current price of $124 per share, there is little upward potential.

Under pessimistic circumstances, Dolphin Analyst believes the decline in travel accommodation demand will be more severe than that of transportation. Therefore, it is expected that the growth rate of the company's room night orders on the platform will significantly slow down to less than 10% in 2024 in the event of a recession in the European and American economies, and ADR will continue to decline in 2024.

In addition, for safety margins, although we still expect the company's profitability to significantly increase in the year of income decline in 2024, we also lowered the average operating profit rate for 2026 to below 30%. Based on the above assumptions, Dolphin Analyst estimated Airbnb's stock price under pessimistic expectations to be $95, which has a downward potential of more than 20% relative to the current stock price.

Previous research on Airbnb: