Amazon’s Earnings Came In Above Expectations, But Are They Sustainable?

+17.31%
Upside
174
Market
205
Trefis
AMZN: Amazon logo
AMZN
Amazon

Amazon (NASDAQ:AMZN) delivered a beat in the fourth quarter of 2014, with its earnings per share coming in at 45 cents, much higher than the consensus estimate of 17 cents. Strong performance across the North American market, as well as electronics and general merchandise and cloud services businesses, drove a 15% increase in net sales during the quarter. Its operating margin improved sequentially from -2.6% in Q3 to 2.0% in Q4, assuaging some of the recent investor concerns regarding the lack of profitability in the company’s business model.

The results were lauded by market participants, and the company’s stock rose by over 10% in after-hours trading. While the earnings report contained some positive news related to Prime subscriptions and efficient management of OpEx, we think it’s still too early to say that the company’s profitability will continue to improve going forward. The guidance for Q1 2015 was soft with top-line growth anticipated in the range of 6% and 16%, and GAAP operating income estimated to be in the range of -$450 million and +$50 million, as compared to +$146 million in Q1 2014. [1] We think Amazon’s top-line growth could slow down in the coming quarters with tougher year-over-year comparisons. At the same time, while the latest results showed higher efficiency against the cost of sales and fulfillment costs, we believe the same costs will have to decrease meaningfully over the coming years for Amazon to improve its profitability. Additionally, while North American results showed higher profitability, profits from the international region were disappointing; we think this lack of profitability within the international businesses could persist over the coming quarters, considering that Amazon is investing heavily in several emerging economies, where the e-commerce markets are highly price competitive.

The trailing twelve month free cash flow was  $1.9 billion in Q4 2014. However, if we normalize the figure by subtracting principal lease repayments and capital acquired under capital leases, the figure drops to negative $2.2 billion (according to company reports). Hence, we’d advise investors to exercise caution before investing into Amazon’s stock at present levels.

Relevant Articles
  1. Up More Than 100% Since The Start Of 2023, Where Is Amazon Stock Headed?
  2. Amazon Stock Outperformed The Q3 Estimates, What’s Next?
  3. Amazon Stock Is Up 50% YTD, Can It Top The Estimates In Q3?
  4. Amazon Stock Surpassed The Street Expectations In Q2
  5. Amazon Stock Is Undervalued
  6. Amazon Stock To Beat The Consensus In Q1

We are in the process of revising our $263 price estimate for Amazon’s stock.

See our complete analysis for Amazon

Prime Subscriptions Grew At A Healthy Pace In 2014

A key positive indicator that came out of the earnings was that Amazon’s Prime subscriptions rose by 53% year-over-year in 2014, with higher growth across international markets than within the U.S. This is despite the recent increase in annual fees  ((Amazon.com’s (AMZN) Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 29, 2015)) We suspect that Prime members could be around 35-40 million globally currently. This represents a strong competitive advantage for Amazon since Prime customers are known to spend much more as compared to non-Prime customers. We expect these subscriptions to grow at healthy rates in the future as well, and this will bolster Amazon’s top-line.

Sales Within Electronics And General Merchandise And Amazon Web Services Businesses Carried Q4 Earnings, While Media Segment Under-Performed

As we expected, Amazon’s worldwide electronics and general merchandise (EGM) sales rose by 21% in dollar terms and 24% in currency neutral terms, driving Amazon’s top-line growth during the fourth quarter. The holiday season was successful for Amazon, as EGM sales rose by 27% and 19% (in currency neutral terms) in North America and international region respectively. We expect the same trend to persist in this business over the coming quarters as well, due to Amazon’s immense scale and unique competitive advantages in this product category.

Amazon’s sales in the ‘Other’ Category, grew by 41% in Q4 due to superior revenue growth in the ‘Amazon Web Services’ business. Amazon’s cloud business is rapidly gaining traction among consumers, and recently worldwide active customers on this service surpassed one million.((Amazon.com’s (AMZN) Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 29, 2015)) In an interesting development, the management announced that it will report its results from the Amazon Web Services business separately starting Q1 2015. Due to a large market opportunity in the cloud services business, we expect this segment to see robust demand in the coming quarters as well, and this will positively impact Amazon’s overall gross margins.

Media revenues fell by 4% in dollar terms and came in flat in currency neutral terms during the fourth quarter. This was partly driven by difficult year-over-year comparisons, as a series of successful game console launches spurred sales in Q4 2013. We think these results are disappointing considering heavy investments are being made on the media business, and a prolonged slowdown in this segment could impact the company’s margins going forward.

Results From International Region Were Disappointing

Amazon’s international sales grew by 3% in Q4. Excluding the impact of currency headwinds, sales grew by 12%. This represented a slowdown compared to currency-neutral growth rates of 18%, 14% and 13% seen during Q1, Q2 and Q3. These results came on top of a seasonally strong quarter, and hence, this indicates all may not be well for Amazon in the international geography (as per our view). Profitability declined as operating income from the international segment was seen at $20 million in Q4 2014 as compared to $151 million in a similar period a year ago. We think these results are discouraging, considering Amazon is making large-scale investments to expand its presence in markets such as China, India, Italy and Spain. In the event, Amazon’s top-line growth continues to fall within the segment, then the likelihood of its profitability improvement could come down in the future.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Amazon.com’s (AMZN) Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, January 29, 2015 []