Amazon’s Stock Shoots Up On Solid Earnings

With net sales growth at 15%, Amazon (NASDAQ:AMZN) delivered a beat during the first quarter of 2015. The earnings were driven by solid growth across the North American and electronics and general merchandise businesses. Additionally, the cloud services business saw acceleration in growth and recorded over $5 billion in annual sales (trailing twelve months). The company’s profitability came in ahead of our expectations as the increase in gross profit more than offset the rise in fulfillment, marketing, technology and content, and general and administrative expenses during the quarter. We are encouraged by this development, as this indicates productivity improvements in the North American region.

Notwithstanding these positives, international sales fell owing to currency headwinds. Moreover, Amazon continues to face profitability challenges in the international region due to heavy investments in emerging markets. Together with heightened expenses on the Prime platform, we expect these factors to continue to weigh on Amazon’s earnings in the coming future. Hence, we will  have to wait for a few more quarters to see if this recent profitability expansion is sustainable in the long-run.

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North America Records Solid Sales Growth Driven By Electronics And General Merchandise Business

Solid growth in the North American segment drove earnings during the first quarter. Revenues in the region rose by 24% fueled by rising demand for electronics and general merchandise (EGM). The EGM category saw 31% growth in North America during Q1 2015, outperforming the broader e-commerce market in the region. Media sales growth at 5% saw acceleration as compared to 1% rise in the previous quarter.

Quite significantly, operating income in the North American region rose by 78% during the quarter to $517 million; this represented a 3.9% operating margin. We believe this performance is encouraging considering it reflects some productivity improvements, which has come on top of high investments in the ‘Prime’ platform.

Though International Sales Growth Accelerated In Currency-Neutral Terms, Its Low Profitability Continues To Disappoint

Amazon’s international segment sales fell by 2% in dollar terms; however, in currency-neutral terms, sales growth came in at 14% which represented acceleration as compared to 13% and 12% rise seen during third and fourth quarter of last year respectively. Again, EGM category was mainly responsible for this growth as the media sales rose by merely 2% (excluding currency movement). Going forward, we expect sales growth to fasten in this segment as the company will be lapping softer year-over-year comparisons.

However, the operating loss in the international segment widened to -$76 million during Q1 2015 as compared to -$33 million in Q1 2014. Excluding the impact of foreign exchange, operating income was nearly breakeven in the segment. ^[1] We believe significant investments in India and China could continue to weigh on these margins in the near-term. Though Amazon is rapidly gaining traction in India, it seems to be struggling in the Chinese market; we will continue to closely monitor its success in these emerging markets, as they are a source of long-term growth for Amazon.

Amazon Web Services Is A Key Growth Driver

The company reported its earnings in the Amazon Web Services (AWS) segment separately for the first time during this quarter — net sales rose by 49% to $1.57 billion in this business. Operating margins in this segment were seen at 16.9%, which came in higher than we earlier anticipated. We believe revenues in this segment will continue to rise sharply in the coming future, due to the immense market opportunity in the cloud services market. At the same time, this will positively impact the company’s overall profitability.

Future Outlook

The management expects annual net sales growth to be between 7% and 18% during the second quarter of 2015. In addition, the operating income (loss) is projected in the range of $(500) million and +$50 million, as compared to $(15) million in the same period a year ago. We expect sales growth to fall at the upper end of this guidance range, driven by continued strength in the North American business coupled with acceleration in the international segment. However, foreign exchange headwinds could become pronounced during the second quarter.

We are in the process of revising our up our $295 price estimate for the company’s stock.

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1. Amazon.com’s (AMZN) Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2015 [↩]