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Even as Growth Slows, Amazon Still Produces Massive Sales

Is decelerating growth the new normal?
Danny Vena (TMFLifeIsGood)

Feb 2, 2019 at 8:09PM

Expectations were high going into Amazon.com's (NASDAQ:AMZN) fourth-quarter earnings report. The company had reported a record-breaking holiday season in late December, fueling hopes for a better-than-expected quarter. That's exactly what happened, but decelerating growth gave investors pause.

Amazon reported net sales of $72.4 billion, an increase of 20% year over year and up 21% if you exclude the unfavorable impact from year-over-year changes in foreign-exchange rates. This came in just shy of the high end of management's forecast, which topped out at $72.5 billion, and comfortably ahead of analysts' consensus estimate of $71.87 billion

Strength across the board
Operating income of $3.8 billion easily exceeded Amazon's guidance of $2.1 billion to $3.6 billion. Net income totaled $3 billion and earnings per share reached $6.04, up 61% year over year. Excluding a one-time credit in Q4 2017 related to the U.S. Tax Cuts and Jobs Act, Amazon's profit nearly tripled last quarter.

There was solid growth across Amazon's operating segments. North American e-commerce sales grew 18% year over year, to $44.12 billion, while international sales of $20.83 billion increased 15% compared to the prior-year quarter. Amazon Web Services continued to post the most robust growth, as revenue from the cloud-computing segment jumped 45% year over year, to $7.43 billion.

Each of the business segments also improved their operating margins. In North America, Amazon's operating margin increased from 4.5% to 5.1% year over year. In the international market, operating margin improved from negative 5.1% to negative 3.1%, as Amazon continued to expand. Lastly, AWS continues to scale, and its operating margin increased to 29.3% from 26.5% a year earlier.

Other areas of interest
There were other interesting tidbits hidden within the bowels of Amazon's massive financial report. Amazon's "other" revenue, which consists primarily of advertising, soared to $3.39 billion, up 95% year over year and topping $10 billion for the year. Subscription revenue -- which includes fees from Amazon Prime memberships, as well as digital video, digital music, audiobook, and e-book subscriptions -- grew 25% year over year to nearly $4 billion, and exceeded $14 billion for the year.

Amazon reported that sales at physical stores declined by 3% year over year, but that requires some context. First, when the company changed Whole Foods' fiscal calendar to match Amazon's, it added an additional five days to the prior-year quarter, making for a tough year-over-year comparison. Furthermore, orders via Prime that are picked up at Whole Foods aren't counted as physical-store sales. Adjusting for these anomalies, sales at Whole Foods increased by 6% year over year.

Finally, Alexa and Echo devices continue to be a perennial favorite of Amazon CEO Jeff Bezos, who gave a nod to the company's voice-activated products in the press release. "Echo Dot was the best-selling item across all products on Amazon globally, and customers purchased millions more devices from the Echo family compared to last year," Bezos wrote. He went on to point out that the number of Alexa skills now tops 80,000, and the team of scientists working on Alexa and machine learning more than doubled in 2018.

A look ahead
For the upcoming first quarter, Amazon is guiding for revenue in a range of $56 billion to $60 billion, which would represent growth of between 10% and 18% year over year. The company expects operating income to rise 21% to 74% compared to the prior-year quarter, reaching a range of $2.3 billion to $3.3 billion.

So why did Amazon's stock price fall after it reported earnings? Amazon grew revenue by 43%, 39%, and 29% year over year in the first, second, and third quarters of 2018, respectively. The company's 20% growth in the fourth quarter represented its third consecutive quarter of decelerating year-over-year revenue growth. With its first quarter revenue growth outlook topping out at 18%, Amazon seems to be acknowledging that the trend will continue. The falling stock price reflects investors' concerns that Amazon's high-growth days may be in the rear-view mirror.

Given the gargantuan size of Amazon's business, it's inevitable that growth will slow. However, it's important to remember that Amazon continues to build out its cloud-computing service, increase its lineup of voice-controlled digital products, expand its international operations, and grow its advertising business. Taken together, this illustrates the significant opportunities that are ahead for Amazon, even in the face of decelerating growth.

https://www.fool.com/investing/2019/02/02/even-as-growth-slows-amazon-still-produces-massive.aspx