Amazon's Margin Myth: Sleight Of Hand
Paulo Santos • 108 Comments
Paulo Santos • 108 Comments
Amazon's Margin Myth: Sleight Of Hand
Paulo Santos • 108 Comments
Paulo Santos • 108 Comments
Oct. 8, 2015, 10:30 AM
- ChannelAdvisor (ECOM -5.7%) reports clients selling on eBay (EBAY -6.3%) saw their same-store sales rise 1.1% Y/Y in September. That's down from 3.4% in August, well below U.S. e-commerce growth of ~15% (per comScore), and the slowest rate of growth over the last 12 months.
- Only a 13.3% increase in Motors same-store sales (down from 20% in August) kept eBay's growth positive. Auctions were down 31%, and fixed-price sales 0.7%.
- Amazon (AMZN -1.9%) fared better, with same-store sales rising 19.2%. However, that's down from August's 24.7%, and also a 12-month low. 35.9% of Amazon-related GMV relied on Amazon's fulfillment services (FBA), up from 29.9% a year ago, with sellers using FBA seeing 30.1% same-store growth.
- Google Shopping/Product Listing Ads (indirectly competes with Amazon) were strong, registering 46.1% same-store growth with the help of higher conversion rates. Some of their growth came at the expense of search ads (dominated by Google), which saw a 9.5% same-store decline.
Aug. 27, 2015, 8:37 AM
- RayJay analyst Aaron Kessler's price target of $640 is unchanged, but Amazon's (NASDAQ:AMZN) slide of the past few sessions puts the stock at nearly a 30% discount to that level, making for an attractive entry point.
- Kessler also takes note of a solid Q3 start based on ChannelAdvisor data, the expectation that Prime along with continued category and geographic expansion will drive long-term retail growth, North American margins at an inflection point, and his belief that AWS estimates could prove conservative.
- Shares +2.4% premarket to $512.80.
Aug. 26, 2015, 7:51 PM
- Amazon.com (NASDAQ:AMZN) is curtailing work on consumer devices, following the high-profile flop of its first attempt at a smartphone, the Amazon Fire.
- The company has dismissed dozens of engineers who worked on the phone at its Lab126 hardware center -- the first layoffs in the division's 11-year history, The Wall Street Journal reports. The division's CTO for devices, Jon McCormack, left to work for Google earlier this month.
- The company is downsizing or halting some ambitious projects, sources say, including a large-screen tablet.
- Amazon's CFO in July credited tighter cost controls as part of a surprise profit.
- Shares gained 7.4% today after an Evercore upgrade.
Aug. 26, 2015, 9:34 AM
- Two months after downgrading Amazon (NASDAQ:AMZN) to Neutral, Evercore's Ken Sena has upgraded back to Buy.
- Sena notes Amazon is down 12% since its Q2 report, and 20% below his (unchanged) $585 target. "[W]e continue to appreciate Amazon’s scale and opportunity for margin expansion within two large and growing addressable markets: Online Retail and Cloud. While we have cited valuation concerns in the past (notably ahead of the prior quarter's result), Amazon nevertheless is showing strengthening secular presence, which is manifesting itself in an improved margin profile and overall outlook."
- He adds Amazon still only has a 14% share of global e-commerce and a 4% enterprise cloud share - 41% in cloud infrastructure (IaaS) and 1% in cloud apps (SaaS), where the likes of Oracle, SAP, Microsoft, and Salesforce loom large.
- Shares have jumped with the help of a 2.8% Nasdaq gain. They're up 57% YTD.
Jul. 24, 2015, 1:40 PM
- Not surprisingly, analysts are rushing to hike their Amazon (NASDAQ:AMZN) targets as shares jump following a Q2 beat fueled in part by an 81% Y/Y increase in AWS revenue. Barclays and B. Riley have upgraded to bullish ratings; several firms were prescient enough to upgrade prior to earnings. Amazon has given back some of yesterday's AH gains; its market cap is at $251B.
- In addition to AWS growth, Amazon's 390 bps Y/Y gross margin improvement is drawing attention. FBN's Shebly Seyrafi (Outperform) attributes the gains to AWS, 3rd-party seller unit growth (45% of paid units vs. 41% in Q1 and a year ago), and lower shipping costs (4.1% of revenue vs. 4.4% in Q1 and 4.8% a year ago). Credit Suisse's Stephen Ju (Outperform) also thinks favorable Japanese comps helped, while adding the Prime price hike and past warehouse investments are cutting shipping loss margins.
- Mizuho's Neil Doshi (Buy): "Revenue growth (ex-FX) accelerated to 27% YoY vs. 21% YoY in 1Q, which marked the strongest growth we’ve in about 3 years. Gross Margins reached a record high of ~35%, and CSOI margin was 4.6%; the strongest we’ve seen since 1Q11. While Amazon continues to invest in the biz, the flywheels are kicking in – Prime subscribers are transacting more on Amazon, while investments in FCs, 3P and AWS are helping to drive margins higher.”
- SunTrust's Bob Peck (Neutral) cautions Amazon's spending history could mean recent margin/profit improvements will be short-lived. "Amazon has a history of 'giving back' operational efficiencies to consumers via lower prices, as well as aggressively investing to drive long- term [free cash flow] growth. Key initiatives include 1) marketplace, particularly on adding fulfillment centers, increasing [fulfillment] for 3P sellers, and expanding in India; 2) Prime, especially on adding content and expanding Prime Now; 3) AWS, adding new features/functionality as well as geographic expansion (new region in India). As a result, we expect margins to trend lower from 4Q’15 onward.”
- On the earnings call (transcript), new CFO Brian Olsavsky stated paid units rose 22% Y/Y, and active customer accounts by 7M Q/Q to 285M. When asked about AWS' growth pickup, he noted major price cuts carried out in Q2 2014 led to favorable comps.
- Prior Amazon coverage
Jul. 24, 2015, 12:45 PM
Jul. 24, 2015, 9:17 AM
Jul. 23, 2015, 5:43 PM
Jul. 23, 2015, 4:46 PM
- Amazon Web Services (NASDAQ:AMZN) had Q2 revenue of $1.82B, +16% Q/Q and +81% Y/Y. Annual growth accelerated sharply from Q1's 49%. AWS segment op. profit rose over 5x Y/Y to $391M.
- Regional/segment performance: North American revenue (excludes AWS) +26% Y/Y to $13.8B; op. profit +114% to $703M. International revenue +3% to $7.6B (+22% exc. forex); op. loss of $19 vs. $2M a year ago. North American Electronics and General Merchandise (EGM) revenue +31% to $10.99B; Media +6% to $2.62B. International EGM revenue +10% to $5.43B; Media -12% to $2.09B.
- Financials: Gross margin (boosted by AWS and 3rd-party seller growth) rose to 34.6% from 32.2% in Q1 and 30.7% a year ago, giving a lift to EPS. Fulfillment spend +21% Y/Y to $2.88B; marketing +22% to $1.15B; tech/content +36% to $3.02B; G&A +24% to $467M. Trailing 12 months (TTM) op. cash flow +69% to $8.98B. Amazon ended Q2 with $14B in cash/investments, and $8.3B in long-term debt.
- Shares have surged to $570.59 AH, easily taking out their old highs and leading Amazon's market cap to surpass Wal-Mart's. The firms that upgraded ahead of earnings are looking smart.
- Q2 results, PR
Jul. 23, 2015, 4:13 PM
- Amazon (NASDAQ:AMZN): Q2 EPS of $0.19 beats by $0.33.
- Revenue of $23.18B (+19.9% Y/Y) beats by $790M.
- Expects Q3 revenue of $23.3B-$25.5B (+13%-24% Y/Y) vs. a $23.89B consensus.
- Expects Q3 op. income of -$480M to $70M. Guidance assumes $580M in stock compensation and amortization expenses.
- Shares +16.1% AH
Jul. 16, 2015, 1:36 PM
- Amazon (NASDAQ:AMZN) states it saw 18% more orders during yesterday's Prime Day promo than it did during last year's Black Friday, and 266% more than on the same day a year ago. Sales from 3rd-party sellers using Amazon's fulfillment services rose nearly 300% Y/Y.
- 34.4M items were sold in Prime-eligible locales, including "hundreds of thousands" of Fire TV HDMI sticks (among the items on sale). "After yesterdays results, we'll definitely be doing this again," says an Amazon VP.
- The figures come in spite of a social media backlash among Prime subs disappointed with Amazon's Prime Day discounts. "Now printing: t-shirts that read 'I stayed up late for @Amazon #PrimeDay and all I got was Tupperware,'" quips one Twitter user.
- Amazon has rallied to new highs amid a 1% Nasdaq gain. A bullish Oppenheimer note regarding AWS growth could be helping: The firm states checks point to accelerating AWS volumes (+100% Y/Y) in spite of limited price cuts over the last 9 months. "We believe Street models do not fully reflect accelerating growth from stronger volumes and easier comps. In addition, we attended the AWS Summit in NY last week and were encouraged by several product announcements, customer stats and high attendance."
- Meanwhile, rival eBay reported a 3% Y/Y Q2 drop in Marketplaces revenue this morning - forex pressures contributed, as did share loss to Amazon and others. Amazon's Q2 report arrives on July 23.
Jul. 14, 2015, 1:13 PM
- A day after Rackspace (NYSE:RAX) announced a services partnership with Microsoft related to Azure, shares are rallying in response to a CRN report stating a similar deal with Amazon Web Services (NASDAQ:AMZN) is close.
- CRN states a channel partner for both Rackspace and Amazon "approached his company with an offer to participate in a beta program in which Rackspace would manage and provide support for his customers hosting workloads in Amazon's cloud." The source: "They are going to wrap their managed 'Fanatical Support' around AWS and essentially become an Amazon reseller."
- AWS had revenue of $5.16B over the 12 months ending March 31, and (per Synergy Research) still controls nearly 30% of the global cloud IaaS/PaaS market.
- Rackspace is now up 8.5% over the last two days. Shares are still down 17% YTD.
May 21, 2015, 11:38 AM
- Two weeks after Bernstein hiked its Amazon (NASDAQ:AMZN) target to $600, Morgan Stanley's Brian Nowak has hiked his target by $70 to $520.
- Nowak thinks 2016 Street gross profit estimates are 5% too low given recent margin growth and ongoing wallet share gains; he estimates gross profit/customer will rise 7% next year. In addition, fulfillment costs/unit are falling for the first time since 2010, as Amazon slows its warehouse-building binge. Nowak sees Amazon once more stepping up its fulfillment spend in 2016, but nonetheless believes its 2016 CSOI will be 5% above consensus.
- Also: 1) Nowak believes Amazon's international losses are smaller than believed. However, a $269M 2015 international loss is still expected due to a strong dollar and Indian investments. 2) Nowak joins a chorus of analysts praising Amazon's Q1 AWS figures, while "conservatively" forecasting AWS' op. margin will fall 100 bps next year to 16% (he thinks the Street is modeling a 190 bps drop).
- Shares are $17 away from a high of $452.65 (set after last month's Q1 report), and up 40% YTD.
- Update: In other Amazon news, the company has announced its Prime Now 1-hour delivery service will start delivering goods from local stores in Manhattan. Amazon plans to expand the service to other locales later this year.
May 7, 2015, 2:52 PM
- Citing enthusiasm about the AWS figures broken out in Amazon's (NASDAQ:AMZN) April 23 Q1 report, Bernstein has hiked its target by $150 to $600, while reiterating an Outperform.
- Bernstein: "[W]e were surprised by AWS's current profitability trajectory, as our assumption had been that Amazon was investing more in sales and in R&D to drive AWS's current hyper-growth." The firm thinks the numbers suggest AWS has more pricing power than previously believed, and notes Amazon has slowed its once-manic price-cutting pace over the last 12 months. "This price discipline coupled with declining costs for computing and storage explain in part the fast margin expansion we have seen for AWS starting in 2Q15."
- Amazon stated AWS had a $265M Q1 op. profit on revenue of $1.57B, and an op. profit of $680M over the trailing 12 months via revenue of $5.16B. JPMorgan responded by valuing AWS at $66B.
- Analyst Ben Thompson in a Wednesday post: "The profitability of AWS is a big deal in-and-of itself, particularly given the sentiment that cloud computing will ultimately be a commodity won by the companies with the deepest pockets ... Amazon is clearly reaping the benefits of scale from being the largest player, and their determination to have both the most complete and cheapest offering echoes their prior strategies in e-commerce."
Apr. 24, 2015, 12:39 PM
- Janney, JPMorgan, and Raymond James have upgraded Amazon (NASDAQ:AMZN) after the company beat Q1 estimates on the back of a 24% Y/Y increase in North American segment revenue, guided in-line, and (importantly) reported AWS had a $265M Q1 op. profit on revenue of $1.57B ($680M and $5.16B for the trailing 12 months). At least 7 other firms have hiked their targets. Amazon's market cap is at $181.6B.
- JPMorgan's Doug Anmuth (upgrade to Overweight, $535 target) now values AWS at $66.3B, or 16x estimated 2016 EBITDA. "[W]e think the reported profitability level far exceeded virtually all expectations. CSOI margins of 17% in 1Q15 and 14% in 2014 have been driven by increasing scale and greater utilization, along with additive services beyond core EC2 and S3 [computing and storage] services. When factoring in heavy depreciation, AWS has EBITDA margins of around 50%."
- Janney's Shawn Milne (upgrade to Buy): "AWS segment margins of 16.9% in Q1, 14.2% in FY14 — well ahead of general Street thoughts that AWS was in 'investment mode,' and losing 5-10% (or more)." He does note Amazon's North American retail op. margin fell to 2.5% in 2014 from 2.8% in 2013 (thanks largely to the Fire Phone debacle), but adds it rebounded to 3.9% in Q1.
- Raymond James' James Kessler (upgrade to Outperform) focuses on Amazon's total margin improvement. "Non-GAAP operating margin of 3.1% was ~100 bp above our/consensus estimates driven by improved gross margins and modestly lower than expected operating expenses. Amazon also guided 2Q margins above consensus at the high end."
- On SA, Brian Nichols argues AWS would be worth $50B at 45x forward op. income, and thinks the business could be valued at $85B if publicly traded by itself. The Panoramic View: "Facebook and other leading tech companies used to garner a 10x revenue valuation when they were in similar stages of development. I think that the same can be applied to AWS."
- On the CC (transcript), Amazon stated active customer accounts rose by 8M Q/Q to 278M (260M paying customers). Y/Y paid unit growth was steady at 20%, and 3rd-party sellers made up 44% of sales vs. 43% in Q4.
- Prior Amazon earnings coverage
Apr. 24, 2015, 9:17 AM
Amazon.com, Inc. provides online retail shopping services. It provides services to four primary customer sets: consumers, sellers, enterprises, and content creators. The company also provides other marketing and promotional services, such as online advertising and co-branded credit card... More
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