- Amazon.com has taken a massive number of measures to shore up earnings.
- Earnings estimates didn't move on these measures, so it's now less likely that earnings guide downs are required.
- On the other hand, these measures have an impact on revenue growth, whose estimates have also not moved. This makes it likely that Amazon.com will guide down on revenue growth.
The title says it all. Amazon.com (NASDAQ:AMZN) is doing its best to increase earnings. Consider just the following. In the last year, Amazon.com:
- Increased 3P (third-party) commissions;
- Decreased the commissions paid to Audible authors;
- Increased the base price for the new-generation Kindle HDX;
- Increased the threshold for free shipping from $25 to $35;
- Increased the Prime membership cost to $99 from $79;
- Reportedly somewhat increased pricing across the board (this is hard to confirm), namely on Subscriber & Save customers;
- Has been caught including the price of shipping on Prime-eligible items;
- Eliminated free shipping towards 10 different European countries.
All of these moves share something in common: they are all geared towards improving earnings. Some of these measures might even have a significant impact. For instance, if we assume 20 million eligible Prime customers, over a year, a $20 increase would improve earnings by $400 million pre-tax. $400 million pre-tax is nearly the same Amazon.com earned in all of 2013 pre-tax ($506 million), so this is something very significant.
The first curiosity
In spite of these measures having significant impact, especially the Prime price increase, Amazon.com's earnings estimates barely budged (Source: Yahoo Finance)
In the last 90 days, the estimate for 2013 EPS moved up just $0.03. Compare that with the $0.74 drop it suffered when Amazon.com reported its Q4 2013 earnings. The difference is massive. This is strange. It's as if new developments are not informing the earnings estimates.
The second consequence
There is a second consequence, which isn't so favorable. Every one of these measures can have a negative impact on revenue growth. Some are already evident, like the way the Kindle HDX has been performing poorly. Others will hit in the not so distant future, like the Prime price increase.
Furthermore, there are a couple of other developments which will also impact growth. These include:
- Amazon.com will start collecting sales tax in Florida from May 1. Florida is the 4th most populous state in the U.S., with 6% of the total population;
- Amazon.com will start seeing the effect of the ebook accounting change being reduced from Q2 2014 onwards. This is so because Q2 2013 already had some of the effect, so at this point, the artificial goosing of the revenue growth rate will start going away.
All put together, between the earnings-goosing options taken by Amazon.com and the other developments impacting growth, it's likely that Amazon.com will start seeing reduced revenue growth from Q2 2014 onwards. Yet, analysts did not increase the earnings estimates due to these developments, and they also haven't decreased the revenue growth rate either. The consensus revenue growth rate for Q2 2014 still sits at 21.2%, a level which I believe Amazon.com will miss. Indeed, I believe that as Amazon.com reports Q1 2014, it will already guide down revenues for Q2 2014.
On the other hand, with earnings estimates so punished in the last 3-4 years, and with so many measures whose objective is to goose margins, I no longer believe Amazon.com will continue guiding down on earnings.
Amazon.com has taken an incredible number of measures to improve its earnings. These measures have not been reflected in the consensus EPS. On the other hand, all of these changes have an impact on revenues, so it's likely that Amazon.com will see a substantial revenue growth slowdown from Q2 2014 onwards, which should already be evident when Amazon.com reports Q1 2014 and guides for Q2 2014.
Additional disclosure: I have options positions which stand to gain from Amazon.com stock going down.