Amazon’s Record Earnings Miss Estimates, Stock Stumbles

After a blockbuster year delivering a significant improvement in profitability, investor expectations were high for Amazon‘s (NASDAQ:AMZN) fourth quarter results. But the online retailer failed to meet consensus estimates for both the top and bottom line. Amazon’s net sales grew about 22% year-over-year (y-o-y) to $35.7 billion in Q4 2015, compared to Reuters’ compiled analyst expectations of $35.9 billion. Its net income more than doubled y-o-y to $482 million or $1.00 per share, but it still missed consensus estimates of $1.56 a share. ^[1]

Considering that other tech majors including Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX) were also on the receiving end of investors’ outsized expectations this earnings season, it wasn’t surprising that Amazon’s stock also fell considerably in after-hours trading. Amazon’s stock had gained around 9% before the results announcement, but lost those gains after markets closed Thursday.

Notwithstanding the market’s high expectations, it is important to note that this was Amazon’s largest reported quarterly profit in its 20-year history and it was also the first time in over three years that the company reported a profit in three consecutive quarters. For full year 2015, Amazon surpassed the $100 billion sales figure for the first time in its history driven by 25% y-o-y retail sales growth in North America and 70% growth in Amazon Web Services (AWS) revenue. For Q1 2016, the company expects net sales between $26.5 billion and $29 billion.

See our complete analysis for Amazon

Solid Growth Across All Business Segments

Amazon’s top line growth accelerated across both the North America and International segments during the fourth quarter of 2015. In North America, its revenue growth decelerated from 26% in Q2 2015 and 28% in Q3 2015 to 24% in Q4 2015. This top line growth was driven by 28% y-o-y growth in the electronics and other general merchandise (EGM) category, and 11% growth in the media category. The success of Amazon’s Prime program (bolstered by Amazon Prime Day) and an expanded selection of products helped contribute to the strong demand that was seen during the quarter. Amazon is likely to continue to outperform the broader e-commerce market within North America in the near term because of various competitive advantages, such as the Prime program and a faster delivery network.

Amazon’s international sales grew by 12% y-o-y on a reported basis to $11.8 billion. Within this segment, a 19% y-o-y growth in the EGM  category was partially offset by a 3% decline in media revenue. Amazon’s Prime membership in the international market grew over 50% in the quarter, and the company’s initiatives such as Free Same Day, Prime Now, Prime Music and Prime Video are likely to aid membership growth further in the coming quarters.

Within the AWS segment, Amazon delivered another quarter of stellar performance. Its net sales increased by 69% during the fourth quarter and its operating margin in the segment rose from 25.0% in Q3 to 28.5% in Q4 2015. While there is a tremendous growth opportunity in the cloud services market, we believe Amazon’s margins in this segment could vary over the next few quarters considering how fast the market is evolving.

Margin Performance Continues To Improve

Amazon’s company-wide operating margin improved considerably over the last year. It improved from 3.5% in Q4 2014 to 3.9% in Q3 2015 to 4.9% in Q4 2015. This was driven by a significant y-o-y increase in profitability across the North American and cloud-services businesses. We are encouraged by this recent improvement in margins, as it indicates that both gross margin improvements (due to growing third-party business) and efficiency improvements are offsetting the increased investments on Prime and other growth initiatives. While the company should continue to see improved profitability going forward, Amazon’s margins could drop in a several quarters owing to increased investments.

We are in the process of revising our $604 price estimate for the company’s stock.

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1. Earnings Call Transcript Q4 2015, Seeking Alpha, January 28 2016 [↩]