Amazon’s Year In Review: Growth Spree Continues Across Segments

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Like most internet companies, Amazon (NASDAQ:AMZN) has had a solid year, with its stock surging by 60% through the year. Strong growth across segments through the year was complemented by certain key acquisitions that drove a positive sentiment among investors. Amazon Web Services has consistently been the high-margin and fast-growing revenue stream for the company in recent years – a trend which continued through 2017. 

Amazon’s operating margins (GAAP) and net income were lower on a year-over-year basis due to investment in operations and expansion in international markets. However, these investments bank on growth in future years due to which low margins have not been received negatively by investors in recent years. A major development for Amazon this year was completing the $13.7 Billion Whole Foods acquisition in late August, and expanding its presence across food and grocery retail. Additionally, the company expanded the addressable market for Echo and Alexa to India  and Japan this year, furthering its vision to create a strong foundation for the Amazon ecosystem. Below we recap some of the major drivers of growth for Amazon this year.

Performance By Segment

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Revenues have grown across segments, as shown below. North America revenues (including e-commerce, subscription and Amazon product sales) increased by around 30% through the first three quarters of the year to $69 billion. Similarly international revenues were up over 21% over the comparable prior year period to $36 billion, as shown below.

However, the non-AWS segments combined saw an operating loss of around $1 billion, while the operating profit for AWS stood at $3 billion for the three quarters combined. Operating income for the North America segment was down 26% y-o-y to $1.1 billion. Amazon has also incurred higher warehousing and shipping expenses in North America attributable to over 30 new fulfillment centers that have opened since the beginning of last year. This year, the company has opened fulfillment centers in Ohio, Oregon, New York, and Michigan. This will likely keep operating margins relatively low in the near future.

Amazon’s international segment has operated at a loss, which has worsened in recent quarters due to Amazon’s attempts to expand and increase its footprint in international markets. In order to achieve this, the company has had to spend considerably, with a significant portion of these operating expenses allocated towards fulfillment expenses, marketing expenses, and promotion costs, which are higher than expenses in markets where the company already has a strong presence. This trend is expected to continue in the near term as the company prepares to battle international competition from Alibaba (NYSE:BABA).

On the other hand, AWS revenues have grown at a CAGR of over 60% in this decade, with the trend continuing through the first three quarters this year. AWS revenues increased at 42% this year to over $12 billion. Amazon’s management mentioned that despite price cuts for AWS in December last year, the company has continued to report strong y-o-y growth in revenues. Furthermore, CFO Brian Olsavsky added that lowering prices in order to cannibalize more expensive competition for AWS has traditionally been a successful strategic decision for the company. This trend is expected to continue in the near term, with Amazon likely to continue to reinvest AWS earnings into international expansion and new ventures.

Strong Guidance For December Quarter

In the fourth quarter, Amazon expects overall revenue to grow around 28-38% on a y-o-y basis to around $58 billion. Better than expected profit margins and EPS in the September quarter has led to some optimism among analysts. Consequently, consensus estimates for Amazon’s earnings per share for the December quarter stand at around $1.74 per share, as compared to around $1.54 in the prior year period.

We have a $1000 price estimate for Amazon’s stock, which is around 15% lower than the current market price. Amazon’s stock price surged from $750 in January to a year high of $1210 in late November. You can modify the interactive charts in this note to gauge how a change in individual drivers can affect our price estimate for Amazon.

See our complete analysis for Amazon

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