Amazon Plunges After Missing Q4 Revenue, Earnings As Concerns Emerge About Future Profitability

Tyler Durden's picture

For years, shorts would tear their hair out quarter after quarter, when AMZN would continue to bleed cash with relentless abandon, only to see the stock soar after earnings. Now, in what may be a perfect poetic symmetry, following the quarter in which Amazon's free cash flow soared to the highest in years, printing at $7.3 billion, or more than triple the year ago period...

 

... on margins that are becoming respectable on both a quarterly...

 

... and LTM basis...

 

... The stock is crashing by 12% at this moment:

 

It wasn't just that: one reason for the 13% plunge may be that in the holiday season in which many had expected that AMZN would take away market share from an imploding retail sector, revenue of $35.7 billion, a 22% increase, actually missed expectations of $35.9 billion, something AMZN has rarely done in the blockbuster for retail spending fourth quarter.

Another reason is that Wall Street finally got ahead of itself. By a lot: it was expecting AMZN to generate $1.55 in EPS. Instead, AMZN missed this by a whopping 30%, with a final Q4 EPS of $1.00 (more than doubling the year ago net income), on operating income of $1.1 billion (a nearly 100% increase from a year ago) which also missed expectations of a $1.24 billion number.

On the spending side, operating expenses increased 21% to $34.6 billion, making some question if the company's core business profits will not be swept by Bezos' many business growth ideas. The CEO's biggest challenge is balancing Wall Street’s thirst for profits against his own ambitions of using new technology - such as unmanned drones and intelligent household gadgets. Bezos is also eager to replicate his U.S. success abroad, including challenging Flipkart Online Services Pvt. for India’s fast-growing e-commerce industry.

According to Bloomberg, "the result was a surprise for investors who have become accustomed to Amazon’s ability to fuel sales by spending heavily on delivery infrastructure and new products. The key question is whether the Seattle-based company can readjust its investments in the face of weaker than anticipated sales. Still, Chief Executive Officer Jeff Bezos appears determined to show that Amazon can keep bringing in more profit and sales - he pulled back on spending last year to deliver a surprise jump in earnings and will be showing Amazon’s first Super Bowl commercial next week.

"Amazon reached this new level of profitability in 2015 that we hadn’t seen previously," said Kerry Rice, an analyst at Needham & Co. LLC. "If they don’t keep that trend going in the right direction, the stock goes down."

For now Amazon is not suffering too much in that regard: Prime memberships rose a whopping 51%, offsetting fears that Amazon's annuity cash flow stream may be throttled.

Curiously, not even the silver lining was enough to save AMZN: the company's cloud service, Amazon Web Services, generated sales of $2.41 billion, beating expectations of $2.37 billion, up 69% from the $1.42 billion a year ago, and generating income of $687, an impressive 28% margin, modestly shy of the $1 billion in $1.1 billion in retail profits across all of the company's other profit lines.

Finally, not even AMZN's guidance was all that bad:

  • Net sales are expected to be between $26.5 billion and $29.0 billion, or to grow between 17% and 28% compared with first quarter 2015. This compares with consensus expectations of $27.6 billion.
  • Operating income is expected to be between $100 million and $700 million, compared with $255 million in first quarter 2015. Wall Street expects $658 million

So yes, a good quarter, but not good enough, and one in which now that AMZN has entered profitability mode, suddenly expectations exist that this profit growth can sustain, and - judging by the crash in AMZN's price - that they won't.

Meanwhile, AMZN continues to grow and grow and grow, perhaps too much for its own good: as the chart below shows, while worldwide growth once again took a leg down, the number of employees at AMZN has now grown to an epic 230,800 up from "only" 154,100 a year ago.