Amazon (NASDAQ:AMZN) reported its Q1 2013 earnings. These came in at $0.18 versus a $0.09 consensus. At first the stock climbed quite a bit on the notion that it had beat or doubled expectations, but one needs to consider that for Amazon, $0.10 in excess or missing on its earnings is basically irrelevant, because it needs just $46 million or a puny 0.28% of sales for a beat or miss of that magnitude.
Also predictable, Amazon's revenues came in slightly below consensus ($16.07 billion vs $16.16 billion consensus). More relevant was Amazon's guidance for Q2 2013, which was as follows:
Net sales are expected to be between $14.5 billion and $16.2 billion, or to grow between 13% and 26% compared with second quarter 2012.
Operating income (loss) is expected to be between $(340) million and $10 million, compared to $107 million in the comparable prior year period.
This guidance includes approximately $340 million for stock-based compensation and amortization of intangible assets, and it assumes, among other things, that no additional business acquisitions, investments, or legal settlements are concluded and that there are no further revisions to stock-based compensation estimates.
As I predicted before the earnings were released, this constitutes another guide-down for Amazon's revenues. The midpoint of the guidance falls at $15.35 billion whereas present consensus sits at $15.94. I'd expect consensus to be revised lower to around $15.7-$15.8 billion or so.
Comparison to my model 1
The model 1 predictions compared as follows to what Amazon actually reported:
In what regards my own modeling, where I use my model 1 for both short term and long term predictions, the major differences were in 3 cost lines and 1 margin line:
- Product margins came in at 11.3% versus my 11.0% assumption. My 2013 assumption is 11.1%, which I will revise towards 11.2%;
- Technology, which came in 5.5% below my estimate. This implied a ratio of Technology/Other revenue of 173.3% versus my Q1 2013 assumption of 183% … but it should be noted that my 2013 assumption is 175% so lower than Q1 2013. I will revise my long term assumptions down 2% per year as a result;
- G&A, which came in 7.2% below my estimate. This implied a ratio of G&A/GMV of 0.78% versus my assumption of 0.85%. Since my 2013 assumption is already 0.80% this will mean no change as this number is somewhat volatile and the yearly assumption is already below Q1 and near the realized value;
- Fulfillment, which came in 4.7% above my estimate. This implied a ratio of Fulfillment/GMV of 5.71% versus my assumption of 5.50%. Q1 is usually the lowest in this regard so this implies a higher 2013 assumption. Presently the assumption is at 5.64%, so I will change the model towards 5.7%.
My own long-term model already implies that technology will get better (less costly) over the long-term, so no surprise there. G&A has some volatility so it won't imply much of a change. As for fulfillment, it might have negative implications for the long term.
All in all the cost relationships held quite well. The minor $40 million difference in net profit is well within the kind of uncertainty one can expect while predicting a company of Amazon's size and basically came from the product margins being slightly ahead of expectations, probably still from the higher margins enjoyed by the new Kindle Fires.
It should also be noted that every revenue growth assumption was very close to what Amazon reported, from 1P to 3P to other revenue.
Revised long-term model
Taking into account the slight differences explained, my revised long-term model now predicts the following:
The predictions are unchanged for the most part, with the margins and cost lines basically compensating each other, only the lower tax rate ends up having a slight positive effect for 2013.
Amazon's earnings report brought nothing new. The growth rates and costs continue mostly as expected - the cost relationships held, with most uncertainty remaining on technology, where improvement is already expected and always difficult to model.
These cost relationships mean that Amazon will have a lot of trouble ever meeting the lofty expectations the Street has for it. At the same time Amazon's growth rates continue to falter and perhaps somewhat amazingly, net shipping costs increased again.
There was nothing in the report to change my opinion that Amazon is a clear short which will never produce enough profit to justify the levels it trades at. I expect this report to lead to another round of downward estimate revisions in terms of revenues, and perhaps also in terms of EPS. These revisions are systematic because the long-term models the Street uses do not respect the stable cost relationships that I have identified,