AWS is the ‘most compelling component’ of Amazon’s story: analyst

Yahoo Finance’s Brian Sozzi, Julie Hyman, and Myles Udland preview big tech earnings with Brent Thill, Jefferies Senior Analyst.

Video Transcript

JULIE HYMAN: Well, you got to pace yourself when it comes to earnings season. We've been talking about a lot of the numbers out this morning. We talked about Tesla, out after the close yesterday. A lot more is coming, of course, and a lot in technology. In particular, Microsoft and Alphabet after the close today. Amazon and Facebook after the close tomorrow, as well as Apple-- throw that in the mix as well.

Brent Thill covers many of these big tech companies. He's the Jefferies senior analyst who tracks a lot of these stocks. And Brent, I'm going to maybe throw a curveball out to you. I don't know. When you look at the sort of ensemble of all of your big tech coverage, what are you sort of the most excited about? What's the question that you most want answered when we start to hear from these companies?

BRENT THILL: I think everyone's question is, you know, post-pandemic, we saw a surge in demand that happened for cloud compute last year as everyone went to work from anywhere. And I think the biggest question is, will this continue? Will we see this ongoing rearchitecture? I think it's permanent personally. I don't believe we're going back to normal. We may go back to the office for a day or two. But ultimately, these architectures are going to have to change. And that helps Microsoft's cloud business. There are teams of business that helps Google Cloud.

We think it aligns perfectly with a lot-- where a lot of our coverage is at. So ultimately, I think that's a big question in terms of overall demand. We saw this complete rapid surge in demand going into the pandemic. It was completely counter to what I think many would have thought. And so I think we're now-- and are we in a digestion period of all that purchasing? Or are we going to continue to see, you know, a massive uptake that we saw last year?

I think the second thing that's on investors' minds is just valuation. Tech valuations have obviously been an incredible surge last year that the software industry saw a 50% increase in multiples. You're continuing to see huge M&A. Yesterday, Thoma Bravo taking out Proofpoint for a very large multiple. And everyone's scratching their head why they would do that at that multiple.

And so I think there's right now kind of the demand environment. And multiples are probably the two biggest concerns. And that's why Microsoft and Google are doing so well in today's [? rank. ?] Google's up 30% year to date. Microsoft's up 17% year to date. And you're seeing that overall demand profile for more value-oriented names do better than the growth names right now.

MYLES UDLAND: And Brent, let's just talk a little bit about Microsoft. And you mentioned M&A in the space, you know, announcing the Nuance deal. Not buying Discord at this time, though, I guess, that's maybe on the table going forward. How you're thinking about Microsoft's strategic position within this kind of big four established tech players, what the Microsoft portfolio looks like, and how you see that evolving, as Satya continues kind of his run here.

BRENT THILL: Yeah, I mean, Nuance was the largest deal in M&A they've done in five years. It was the second largest deal they've done since behind LinkedIn. And LinkedIn has been, I think, a hit. I think it's-- they've done a great job with LinkedIn. So I think underneath this current management team, they've proven that that they can go after strategic assets, expensive assets, and actually pull it off.

So Nuance is an interesting one. It cracked the code for healthcare. It cracked the code because Microsoft was walking into healthcare with a generic tech offering. Now they can walk into a doctor and say, hey, look, this is specific technology you're using to review a patient. So we don't think this is the last M&A deal in healthcare for Microsoft. Ultimately, we think their job is to have a lot of conversations with a lot of strategic tech partners. And ultimately, I think we've been hearing the chatter. Are they going to buy Pinterest? Are they going to buy Discord?

And ultimately, we think those conversations still can be rolling. But I think that they have been disciplined. They haven't gone out and blown a ton of capital at once. They've been thoughtful. They've digested. Last year, their biggest deal was in video games. This year, again, in healthcare. So our sense is that that will be a question tonight for them, is like, is your M&A philosophy changing? There's a lot of chatter of potential transactions. How are you thinking about it? I don't think-- I think there's enough organic fire or wood in the fire, if you will, to keep this burning for a while.

When you look at Microsoft Teams, it's the killer app for Microsoft. Secondarily, Office 365, everyone's continuing to move their email and productivity systems to the cloud. They're upselling to a higher level security with E5, which is a higher price point. Azure, which is their cloud compute platform, is the second next to AWS. And they're way behind Amazon, but they have a really great position in the hybrid for those that want to stay on-prem and go to the cloud together.

So Microsoft is resonating very well. They're still going to drive double digit growth without acquisitions. So we think ultimately they will be inquisitive. They will do more deals. But I don't necessarily see another $20 billion deal coming down the pipe in the next few months.

BRIAN SOZZI: And Brent, on Amazon, do you think the Street is undervaluing Amazon's core retail business? So much focus on the growth rates in AWS, the growth rates inside of the advertising business, but I have to say, I look at that quarter out of UPS this morning. It tells me that the structural shift to e-comm shopping continues to be very, very strong.

BRENT THILL: I look at it the other way. And again, you're talking to a 20-year software analyst. You know, I think the power of AWS and their advertising business and the other software parts of their business and subscription models are the most exciting. I think investors are really concerned about the overall e-comm business in the short-term, given how big the comps are. Right? We're going to get into 40%, 50% comps coming up here in the next couple of quarters, given the pandemic we're lapping.

So, you know, they have tough comps coming up there. They have easier comps on the ad and software side. So we tend to put-- we do a sum of the parts analysis. And we look and give Amazon a much higher multiple for those other businesses. The e-comm business, I think, is well-known. And I think it's appreciated. But I think the underappreciated nature are these higher margin businesses that we're really excited about.

And, again, if AWS were spun out and standalone, it would be one of the biggest tech companies on the planet. And we continue to believe that will drive a pretty high multiple. Nothing against the e-comm business, but, you know, I think there's a reason why Andy Jassy is in charge of Amazon now. And it came out of AWS, and that is their workhorse is the recurring subscription model with very, very high margin revenue. And we think that's-- that, to us, is the most appealing component of the story.

JULIE HYMAN: Well, Brent, godspeed over the next few days as we get all these numbers. I know that you're going to be very, very busy. Brent Thill is Jefferies senior analyst who covers a lot of these big tech names. Thanks so much. Appreciate it, Brent.