Amazon: May Well Surprise The Market

About:, Inc. (AMZN), Includes: EBAY
by: Vivek Gupta

Recently, Amazon (NASDAQ:AMZN) came out with its financial results for the fourth quarter of FY 2013. Soon after the results, its stock price dropped sharply as the world's largest online retailer failed to meet the market expectations.

During the last one year and up till the results, the stock price of the company showed a significant run-up. In fact during the period, the company achieved a milestone of its own when its valuations went past $150 billion. However, another thing that rose with the valuations was expectations. The market was expecting much better numbers from the company, which the company failed to deliver. The company posted a net income of $239 million, or $0.51 per share, against analysts' expectations of $0.71 per share, which led to the fall.

So, does the fall offer an opportunity for investors to enter the company? I will try to dig deeper into the results as well as the guidance given by the company to find out the answer.

First, the results

The company's worldwide revenue grew 20% to $25.59 billion or 22% excluding the $258 million unfavorable impact from year-over-year changes in foreign exchange. Operating income grew 26% to $510 million in the quarter, as compared to $405 million a year earlier. Its profits grew by 146% to $239 million in the fourth quarter, as compared to the same period last year.

Segment-wise performance:

  • North America segment:

The segment's revenues grew 26% to $15.33 billion. Within the segment, Media revenue grew 21% to $3.51 billion, EGM revenue grew 25% to $10.65 billion, and other revenue grew 52% to $1.17 billion. The segment's operating income increased 19% to $725 million, representing an operating margin of 4.7% as compared to 5% a year earlier.

  • International segment:

The segment's revenue grew 13% to $10.26 billion. Within the segment, Media revenue grew 3% to $3.71 billion, and EGM revenue grew 19% to $6.48 billion. The revenue was hurt by $244 million year-over-year unfavorable foreign exchange impact. The segment's operating income increased 116% to $151 million, representing an operating margin of 1.5% as compared to 0.77% a year earlier.


For the ongoing quarter, the company expects net sales to remain between $18.2 billion and $19.9 billion, representing an expected growth rate between 13% and 24% year-over-year. The operating income is forecasted to remain between $200 million loss to a $200 million profit, as compared to a profit of $181 million a year earlier.

Though the company reported a decent growth in revenues as well as profits, the growth fell short of the market expectations. The market was expecting a much more successful holiday shopping season.

Before looking into the reasons behind the fall, let's first look at the reasons behind the rise of the stock price during the last few years. The prime reason behind the rise was the company's exceptional revenue growth, which during the last few years had been beating the street expectations by a wide margin (most of the time). The company was among the market favorites during all these years, as it showed exceptional and constant growth in revenues. The market rewarded the company's above-expectation performance by taking the stock price higher. The chart below clearly demonstrates that the company's revenues and valuations go hand in hand, particularly during the last couple of years, as the market was amazed by the growth despite the ever growing revenue base.

However, the recent results as well as the guidance did not quite live up to the expectations. In fact, the results and guidance clearly signal that the growth is moderating, a probability that the company had been defying since the last few years. The revenue growth rate declined 200 bps (from 22% to 20%) for the quarter and 500 bps (from 27% to 22%) points for FY 2013. The new reality hit the sentiments as well as the company's stock price.

The moderating growth rate may well transform the way in which the investors look towards the company. It is highly likely that the investors may start looking at the other aspects of the company's business, which till now was getting very little attention, like operating margins. The operating margins have been showing a constant decline (see the chart below) during the last few years, but the decline was not a concern for the investors as the revenues were growing above expectations.

The margins are declining ever since mid FY 2010, and the trend is still going on, as the company forecasted a possible loss for the ongoing quarter.


The results are below the expectations, and the guidance is not offering any comfort. The revenue growth is moderating, and it is highly unlikely that the company can take the growth rate back to the historical levels. With the declining revenue growth, investors may soon look at the other aspects of the company's business; most importantly margins that do not present a pretty picture, but so far is not a concern for the investors (see the table below).

Despite the growth moderation, the company is growing faster than the other online retailers like eBay (NASDAQ:EBAY), which showed a 13% growth in merchandise volume during the same period. However, the valuations that the company currently enjoys demand an exceptional growth. So, the company will have to either get back to its historical revenue growth rate or will have to improve its profitability. Otherwise, it is highly unlikely that the stock can carry on with its upward momentum, or the stock can touch its recent highs due to two simple reasons:

  • The valuations that demand an exceptional growth, which the company may not be able to deliver.
  • The declining operating margins that may well turn negative during the ongoing quarter.

However, there is a silver line at the end. The company is seemingly aware of the fact that the growth is moderating and it's the time to focus on cost cutting (or subsidy reduction). That is why the company for the first time since the launch (nine years ago) of Prime in the U.S. is considering increasing the price of Prime between $20 to $40 in the U.S., a first big step towards margin improvement. The company can take more such margin booster steps in the times to come. So, the company may well surprise the market with a quick ramp-up on the margin front. However for the time being, the valuations do not look cheap as the revenue disappointment is likely to continue in the near future.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

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.