Last quarter, when Amazon reported otherwise respectable Q3 earnings, the market hammered the stock after margins unexpectedly shrank to a 6 quarter low, its AWS cloud segment disappointed, and Amazon guided to surprisingly disappointing operating income guidance. But it wasn't just last quarter: AMZN shares closed lower the next day after four of the past five announcements. Such earnings disappointments were sufficient to create a material schism between the rest of the FAANG complex, which soared higher in the post-QE4 period, and Amazon which has failed to make much headway.
Well, Amazon's period in the penalty box is finally over, with the stock soaring 15% after hours after it reported Q4 earnings, joining its FAANG peers in the quatro commas club with a market cap finally well over $1 trillion.
Here is a summary of the fourth quarter highlights:
- Q4 Net Sales $87.4B, above the consensus estimate of $86.17B, and above the high end of the company's own range of $80-$86.5BN
- Q4 EPS $6.47, smashing expectations of $4.11
- Q4 operating income $3.88 billion, up 2.5% y/y, and also smashing estimates of $2.75 billion
- Q4 AWS Net Sales $9.95B, also modestly beating expectations of $9.89B, and up 34% Y/Y, a modestly slowdown from 45% a year earlier
In short, Amazon beat analyst expectations across the board during the holiday quarter: on revenue, operating income, and AWS sales (barely). Impressively, Jeff Bezos even defied predictions for a slump in net income, pulling in $3.26 billion, from $3.02 billion a year earlier.
Looking to Q1 2020, guidance was also solid:
- Net sales are expected to be between $69.0 billion and $73.0 billion, or up between 16% and 22% Y/Y, vs Est. $71.56BN.
- Operating income between $3.0 billion and $4.2 billion, compared with $4.4 billion in first quarter 2019.
It is worth noting that the guidance includes approximately $800 million lower depreciation expense due to an increase in the estimated useful life of our servers beginning on January 1, 2020.
And yet, despite the otherwise impressive outlook, taking the midline of Amazon's Q1 revenue guidance of $71BN would indicate another modest slowdown in total revenue, the lowest since March 2018.
Another potential blemish: after the company's profit margin nearly doubled to an impressive 7.4% in Q1 2019, largely thanks to the increasing contribution from AWS, in Q2, Q3 and then again in Q4, profit slumped again, and the profit margin of 4.4% was the lowest going back to Q1 2018.
Meanwhile, even though AWS beat revenue expectations of $9.89BN, reporting $9.95BN in sales, the growth rate continues to decline, and in Q4 dropped to 34%, the lowest on record.
As usual AWS was the primary source of profit, and with $2.6BN in operating income (up from $2.2BN a year ago) or 67% of the company's total operating income of $3.879. Meanwhile, the international division continues to burn cash, and despite generating $23.8BN in sales, it resulted in yet another loss of $617MM in Q4.
To summarize, AWS revenue growth:
- Q1 2018: 48%
- Q2 2018: 49%
- Q3 2018: 46%
- Q4 2018: 46%
- Q1 2019: 42%
- Q2 2019: 37%
- Q3 2019: 35%
- Q4 2019: 34%
The good news however is that after declining for a year, AWS operating margin finally posted a modest rebound:
- Q1 2018: 25.7%
- Q2 2018: 26.9%
- Q3 2018: 31.1%
- Q4 2018: 29.3%
- Q1 2019: 28.9%
- Q2 2019: 25.3%
- Q3 2019: 25.1%
- Q4 2019: 26.1%
To be sure, it's not just AWS: Amazon's North America segment margins finally managed a modest rebound, from a 2 year low of 3.01% to 3.54%, even as international margins declined once more, dropping to -2.59%. This group has failed to generate positive cash flow for years.
US margins posted a modest rebound because as Bloomberg notes, Amazon may have tapped the brakes ever so slightly on spending in 4Q: "The company’s fulfillment costs, technology and content costs (largely salaries for tech workers and R&D), and shipping, grew by slightly less than they did the prior quarter as the company ramped up to meet the demands of one-day shipping for Prime members."
That’s not to suggest Amazon is going out of its way to be frugal. The company’s worldwide shipping were a whopping $12.8 billion in 4Q, from $9 billion a year earlier.
Indeed, Amazon's margins remain razor thin (aside from AWS), and for those wondering why, here is the answer: its employees increased by 48,000 in one quarter, and 150K over the past year, to a record 798,000! While most of that is likely linked to the company's expansive logistics operation, AMZN continues to also hire rapidly for tech businesses like Alexa and AWS. These are not minimum wage jobs.
Even so, after a modest decline last quarter, the company's tremendous free cash flow has managed to rebound and is now back to a record $25BN.
Discussing Amazon's earnings, Bloomberg summarized "good things: Advertising is doing well, offsetting some of the one-day shipping drag. International losses widened and growth slowed there. The reaction we are seeing right now is the quelling of anxiety about AWS margins."
Finally, Amazon’s foray into physical stores with Whole Foods Market still doesn’t look like a major source of cash. Sales in Amazon’s physical stores category eased 0.9%, to $4.36 billion during the quarter, the only one of Amazon’s revenue categories to record a decline during the quarter.
Online stores, seller services, Amazon Web Services, subscription services (mostly Prime) and other (mostly advertising) all saw gains.
None of the potential red flags mattered to investors however, who focused on the solid beat and the impressive guidance, and pushed the stock as much as 15% higher, to a new all time high above $2,100 and a market cap over $1 trillion.
