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Summary

  • Topline revenue growth remains impressive, driven by the US and services.
  • Profitability remains weak on the back of higher fulfillment and technology costs.
  • Bezos continues to focus on growth and new investments, while investors are eager for profits after a decade of losses and suboptimal profitability.

Last Thursday's earnings announcement by Amazon.com (NASDAQ:AMZN) did not please investors, who sold their shares following the release. Falling to levels approaching the $300 mark, shares are trading at the lowest levels since October of last year, reinforcing the recent negative momentum.

Bears appear to have taken over short-term momentum driven by the desire of shareholders for earnings, worries about increased competition and the recent technology momentum sell-off. That being said, a long-term short position remains tricky. This is especially true if Bezos succeeds in this vision to dominate major consumer areas.

First Quarter Headlines

Amazon.com reported a steady quarter with revenues increasing by 23% to $19.74 billion. Unlike many other US businesses, Amazon actually benefited from foreign currency moves, reporting a $10 million favorable impact.

Net earnings came in at $108 million compared to $82 million last year. Diluted earnings per share were up by five cents to $0.23 per share as the company continues to report razor-thin profit margins.

Looking Into The Numbers

Reported topline revenue growth actually accelerated from the reported 20% year-on-year growth which has been reported in the fourth quarter of last year. Product sales advanced by 18.3% to $15.71 billion, while service sales growth remained impressive, posting a 44.2% growth in revenues to $4.04 billion. The latter business includes some of Amazon.com's new services, like the Web Service business.

The reported $19.7 billion in revenues came in at the high end of the guidance issues last quarter, when Amazon.com anticipated first quarter revenues of $18.2 to $19.9 billion.

Besides the service business, the domestic activities fuel revenue growth. North American revenues rose by 26.3% to $11.86 billion with operating earnings improving to $562 million, resulting in operating margins of 4.7%. The domestic activities have shown superior revenue growth and earnings for a long time now.

The international business reported a 18.0% increase in revenues to $7.88 billion as operating losses increased to $60 million.

Reported operating income fell by 19% to $146 million, coming in at the higher end of the guided -$200 to $200 million profit estimate. As Amazon.com does not split earnings from its divisions separately, it remains difficult to gauge the profitability of key activities such as its core merchandise business, Prime and Amazon.com Web Services, among others.

Second Quarter Guidance

In traditional fashion, Amazon is issuing a wide and rather conservative guidance. Second quarter revenues are seen between $18.1 billion and $19.8 billion, which implies year-over-year growth of 15% to 26%. For your reference, analysts were looking for revenues of roughly $19 billion.

Disappointing is the fact that the company sees increasing operating losses in the quarter. Operating losses are seen between $45 million and $55 million, compared to earnings of $79 million last year. While Amazon appears to be cautious again in its outlook, this released guidance appears very soft.

Financials and Valuation

Amazon.com ended the quarter with $8.7 billion in cash, equivalents and marketable securities. Holding $3.1 billion in debt results in a net cash position of roughly $5.6 billion.

Trading at $303 per share, the business is valued at $140 billion, which implies that operating assets are valued at $135 billion at the moment. Based on 2013's annual revenues of $74.5 billion, the company is valued at 1.8 times annual revenues and roughly 500 times last year's earnings of merely $274 million.

New Venture Spending

Over the past decade Jeff Bezos has managed Amazon.com so it essentially breaks even by investing earnings from the core business in various new ventures and services. This includes superior delivery standards, the Kindle and overseas markets. More recently, Amazon.com has focused on Prime with its own media offerings, as well as Amazon.com Web Services.

Fulfillment costs increased 29% in the last quarter, thereby outpacing revenue growth as costs increased to $2.32 billion. Net shipping costs approached the billion mark, making up 5.0% of total revenues. Increased costs are a major reason for the recent Prime price hike from $79 to $99 per annum. Prime was introduced in 2005, but has not hiked its pricing ever since despite inflation and improved services. Analysts estimate that Amazon.com has about 25 million Prime members, so the price hike could boost the bottom line by about $500 million going forward.

Technology and content costs related to Prime offerings, as well as Amazon.com's Web Service, rose by 44% to $1.99 billion. Ahead of last week's earnings release, Amazon.com announced a licensing agreement with HBO to make Prime Instant Video the exclusive only subscription home for HBO programming. With these kinds of deals, Amazon aims to compete with industry giants like Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL).

Other huge and long-term investments include the move into online grocery deliveries, which Amazon.com has been testing for years on a smaller scale in places like its Los Angeles and its hometown of Seattle.

Is Shareholder Patience Running Out?

For years, investors have tolerated the focus on growth and customer service over earnings, but a recent 25% sell-off in Amazon.com's shares and disappointment with the new profit guidance suggests some investors might be losing their patience.

So far,Bezos has had shareholders on his side as Amazon.com has grown aggressively over the past decade, boosting the share price despite the lack of significant earnings. Combined with "overinvestments" to ensure dominance in key consumer areas in the future through additional distribution, technology and services, earnings have virtually been non-existent.

Investors have always tolerated this, but they appear to be tolerant no longer, putting pressure on the shares. Yet the continued quest for growth implies that Amazon.com is on track to report revenues of at least $90 billion this year, making the stock actually not so expensive on revenue multiples. While we know that earnings are "artificially" depressed due to Bezos' aggressive expansion programs, the question remains how much the true intrinsic earning power of Amazon.com really is. The limited information about the financial performance of the individual businesses makes such an evaluation an impossible task.

Increased uncertainty about the answer of this question continues to put pressure on the shares, which still represent a market valuation of $140 billion. Yet the quest for domination makes Amazon.com an extremely risky short if Bezos' vision materializes in the long run. On the other side, the company has a lot to prove to justify the current valuation, especially in terms of earnings.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Amazon.com - Investors Might Be Losing Patience With Bezos