Can The Operating Leverage In Amazon’s Business Beat Its India Blues?

Amazon‘s (NASDAQ:AMZN) reported its Q4 earnings on January 31. In addition to beating consensus estimates on revenue and EPS, the company more than doubled its trailing twelve months free cash flow. Amazon’s total revenue grew to $72.4 billion (+20% y-o-y) and the company has guided for Q1 revenue to come in between $56-60 billion (+10-18% y-o-y), which includes 210 bps of forex headwinds.

Our interactive dashboard on Amazon’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

Takeaways from Q4:

• North America: Revenue grew to $44.1 billion (+18.3% y-o-y), while the segment operating margin improved to 5.1% (+60 bps y-o-y). The weakness in online stores appears to be more of an accounting issue due to the re-alignment of Whole Foods’ fiscal calendar, adjusting for which Whole Foods was up 6% y-o-y versus the -3% reported.
• International: Revenue grew to $20.8 billion (+15.5% y-o-y), while operating margin improved to -3.1% (+200 bps y-o-y). For India, Citi estimated that Amazon had a GMV of ~$5 billion. In the worst case, even if that GMV were to go down to zero, we estimate that the revenue impact to Amazon would be at most around $1 billion. Add to it the ~$5 billion that Amazon has already invested and $16 billion worth of its existing business as valued by Citi. Thus, if things do not go as planned in India for Amazon, the total downside would be around $21 billion, or $42 per share (about 2% of our total price estimate for the company).
• AWS: Revenue grew to $7.4 billion (+45.3% y-o-y), while the operating margin improved to 29.3% (+280 bps y-o-y). While competition is increasing in the cloud space, AWS remains a market leader and continues to see strong growth.
• Advertising: Amazon’s advertising business has been growing at a fast clip. The Others segment, most of which is advertising, more than doubled its revenue for nearly every quarter for 2018, with the exception being 97% growth in Q4. Some of this relative slowdown appears to be due to accounting changes.

Amazon seems to be now working towards squeezing out the last drop of efficiencies from its investments, as has been evident in operating margin expansion across segments, which has also positively reflected in the company’s free cash flow which grew to $19.4 billion (+134% y-o-y).

Do not agree with our forecast? Create your own price forecast for Amazon by changing the base inputs (blue dots) on our interactive dashboard.