Amazon’s Margins Take Another Hit As Sales Growth Slows Down

by Trefis Team
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    Quick Take
  • Amazon announces earnings for Q1 2013. Revenue growth slows down to 22% from 34% during the same period last year. Operating margins decline to 1.12% from 1.45% last year.
  • Strong overall growth in electronics and other general merchandise sales while media sales growth slows down internationally.
  • Growth in sales of digital products and Amazon Web Services will drive margin improvement in the future.

Amazon (NASDAQ:AMZN) reported its Q1 2013 earnings Thursday, with revenues growing to $16 billion, up 22% year-over-year. The 22% growth was well below the 34% growth during same period last year. Most of its sales growth was driven by the services segment which grew sales at about 45% to $2.8 billion from $1.9 billion a year ago. Electronics and other general merchandise also reported strong sales which grew at about 28% globally. Amazon’s operating margins as a percent of consolidated sales for the quarter were 1.12%. Net profits declined 37 percent to $81 million for the period.

The primary factor behind the growth in margins was the success of services segment which includes its Amazon Web Services business. We believe that the company’s push towards launching more services will result in margin improvement in 2013. The growing popularity of the content and web services businesses which have higher margins will also help profitability going forward. In this quarter, operating margins declined to 1.12%.

Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis for Amazon’s stock here

Electronic And General Merchandise Revenues Continue To Grow

The Electronic And General Merchandise revenues continued to grow in 2013 as sales increased 28% to $10.2 billion. Worldwide, the contribution of EGM to overall sales increased to about 61% from 55.6% a year ago. The North America segment still contributes the majority of revenues to EGM sales, which accounts for about 65% of total North America sales. The growth was helped by a 30% growth in paid units as the number of active customer accounts exceeded 209 million.

The company reported Media revenues of $5 billion, a 7% y-o-y growth. The growth was considerably slower than the 19% y-o-y growth in Q1 2012. The international segment was the primary contributor to the deceleration with a 1% y-o-y growth. This was despite the company launching Kindle stores in several emerging markets such as Brazil, China and Europe. North America and international operations contribute equally to media revenues.

Growth Of Digital Content To Drive Margin Improvements In The Future

Amazon groups its web services business under the Others segment in its earnings reports. This segment constitutes about 5% of its net revenues and is the fastest growing with a growth rate of 59%.

We believe this growth comes majorly from the Amazon Web Services business which provides start-ups and big corporate clients with data centers, computers and bandwidth which can be rented to support online activities. The aggressive ongoing price war between Google, Microsoft and Amazon for the prices of these services suggests that the company enjoys the considerable margins on these services. We believe that the growing popularity of these services will mitigate the negative impact of the costs associated with fulfillment centers that Amazon is opening to speed delivery of physical goods to customers and hence estimate its profit margins to improve in the near term.

We have a revised $241 Trefis price estimate for Amazon which is 12% below the current market price.

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