Investors in Amazon.com (AMZN) are reacting in almost traditional style to its earnings results. Shares rose during the regular trading session on Thursday, sold-off aggressively in after-hours trading on the headline results to recover thereafter.
Under command of Jeff Bezos, Amazon.com continues to focus on the long term, with investors still believing that Bezos is on the right track. This is even as some are pushing more aggressively for higher earnings over revenue growth.
I continue to believe that investors holding a short position continue to have the riskiest position, especially in the long run.
Fourth Quarter Highlights
Amazon.com posted fourth quarter revenues of $25.59 billion, up 20.3% on the year before. Revenues came in below consensus estimates at $26.06 billion.
GAAP earnings more than doubled to $239 million for margins of less than one percent, as Amazon.com focuses on gaining market share and serving its customers. GAAP earnings on a diluted basis came in at $0.51 per share and missed consensus estimates at $0.66 per share.
Looking Into The Final Quarter
Revenue growth was driven by "service" sales, which rose by 44.7% to $4.51 billion. Product sales were up by 16.1% to $21.07 billion. While reported sales slowed down to 20.3%, growth came in at 22% in constant currencies.
Amazon.com again demonstrated some gross margins gains, which were up by 240 basis points to 26.5%. Fulfillment costs were up by 80 basis points to 11.4%, while marketing costs were up by 40 basis points to 4.4% of sales. Technology and content costs were up by a full percent point to 7.3%. Selling, general and administrative costs totaled just 1.1% of sales.
In traditional style, Amazon.com reported very modest operating earnings of just 2.0% of total sales, or $510 million. This means that the company increased margins by some 10 basis points compared to a year earlier.
Amazon.com posted full-year revenues of $74.45 billion, up 21.9% on the year before. The company posted modest earnings of $274 million compared to a $39 million loss in the year before.
The company's unique cash flow model gives the company access to a lot of cash. Amazon.com holds $12.4 billion in cash and equivalents, operating with a solid net cash position of $9.2 billion.
US Drives Results
The US operations reported solid results, increasing its revenues by 25.9% to $15.33 billion. Operating margins have been under pressure a bit, falling by 25 basis points to 4.7% of sales before factoring in stock-based compensation.
International operations reported sales growth of 12.8% to $10.26 billion. Operating income excluding stock-based compensation rose by 70 basis points to 1.5% of sales.
First Quarter Guidance
For the current first quarter, Amazon.com sees revenues of $18.2 to $19.9 billion, which is up between 13% and 24% on the year before. Operating results are seen anywhere between a $200 million loss and a profit of $200 million, which compares to operating earnings of $181 million in the first quarter of last year.
Analysts expected Amazon.com to guide for first quarter revenues of $19.7 billion and operating income of $368 million.
While the guidance is soft, Amazon.com is traditionally conservative in its guidance. As an illustration, Amazon.com guided for fourth quarter revenues of $23.5-$26.5 billion, as revenues came in at $25.59 billion. Operating earnings of $510 million came in ahead of the guidance of a loss of $500 million to a profit of $500 million.
Is Lack Of Earnings Testing Investors' Patience?
Amazon.com's shares sold off in after hours after the "miss" and softer guidance for the first quarter. In general, Amazon.com issues a cautious guidance, beats that guidance, while analysts have raised their expectations to higher levels causing a renewed disappointment. In the meantime, shares have typically risen between earnings reports, although analysts' operating earnings consensus for the first quarter have been quite aggressive.
As noted before, gross margin expansion was mostly "reinvested" through higher expenses in the business, and one of those costs are the distribution costs, largely incurred by the free shipping of its $79 per year Prime program.
Costs for users of the service have been flat for the past nine years, yet Amazon.com might be passing on higher distribution costs to its customers. CFO Szkutak acknowledged there is an internal debate about a price hike of anything between $20 and $40. Analysts believe that the company might have 25 million Prime users. As such, a hike could add $500 million to a billion to the bottom line per annum.
Besides free shipping, Amazon.com has poured money into great distribution capacity as well as free video for the Prime members and book-lending. Amazon.com is not afraid that a potential price hike might scare off users, as it had to limit new Prime membership sign-ups during the period. The 40,000 videos in the Prime Instant selection and its own television production continue to increase appeal and perceived value of Prime to its users.
Takeaway For Investors
At $380 per share, the valuation for Amazon.com has risen to roughly $180 billion, or roughly $170 billion when factoring in the solid net cash position of the firm. As the firm does not report any meaningful profits at the moment, price-earnings ratios are useless while some investors and analysts might be pushing for Amazon.com to show some profit growth in the periods ahead.
In October, just ahead of the third quarter earnings release, I checked out Amazon.com's prospects. Ever since, shares have risen by another 15-20% in anticipation of a strong holiday quarter.
The debate with Amazon.com is always about the lack of earnings as indicated by the "bears", while more bullish investors point out that Amazon.com makes deliberate "overinvestments" in distribution, technology and customer service. Losses are incurred in some new ventures like Kindle, the cloud business and Prime, subsidized by the core operations. In my eyes, the long-term revenue and customer service success makes a long-term bearish position the most risky.
Looking back a few years ago, and it becomes obvious that at some point Amazon.com was solidly profitable. In 2009, it managed to earn $1 billion on revenues of $25 billion. While growth is subsidized in recent years, Amazon.com could have achieved $3 billion in earnings over the past year if it achieved similar earnings margins compared to 2009. Yet, even this cannot justify the current valuation.
Yet, if operating margins could be improved towards let's say 10% in the medium-to-long term, the current valuation would be much easier to justify. Note that competitors like Wal-Mart (WMT) achieve margins of 6%. Growth could lead to a higher multiple compared to that competitor, while operating earnings could be higher due to the less labour-intensive business model.
Under command of Jeff Bezos, Amazon.com reiterates its mission to sacrifice current earnings for long-term value creation. Therefore, traditional metrics like price-earnings are not that applicable, which does not mean that the company is "immune" to an earnings miss.
While I agree that a violent sell-off of 20%-30% could easily occur, the stock continues to show decent momentum for now. I remain a very long-term optimist about Amazon's prospects. To my opinion, shorts continue to have the most risky position in the stock.