After the bell on Thursday, shares of Amazon (NASDAQ:AMZN) fell about 4% after the company reported fourth-quarter results. Overall, the period was mixed, with a revenue miss but a bottom-line beat. The company still is spending too much on the operating side, and poor guidance will definitely take a chunk out of the growth narrative.
While $43.7 billion in revenues seems like a lot, it missed Street estimates by about a billion dollars. AWS is down to 47% year-over-year growth from 69% in the year-ago period, thanks to a much higher base number. Additionally, the company gave this guidance, which was extremely disappointing:
- Net sales are expected to be between $33.25 billion and $35.75 billion or to grow between 14% and 23% compared with first quarter 2016. This guidance anticipates an unfavorable impact of approximately $730 million or 250 basis points from foreign exchange rates.
- Operating income is expected to be between $250 million and $900 million compared with $1.1 billion in the first-quarter 2016.
The Street was expecting just under $36 billion in revenues, or 23.4% growth, so the top end of Amazon's range didn't even get to that figure. Additionally, the company was expected to produce $1.65 of EPS, up from $1.07 in the prior year period. With operating income guidance showing a potentially large drop, Amazon might find it tough to reach last year's number. Don't forget that EPS numbers came down significantly after the big Q3 2016 miss.
I mentioned Q4 showed an earnings beat, but that doesn't tell the story. The company continued its gross margin improvement, up 189 basis points over the prior year period. However, significant operating expense growth continued, headlined by a more than 43% increase in marketing expense and nearly 84% increase in general and administrative expense. Net shipping costs rose by 43%, much faster than the rise in revenues. Operating margins for AWS only improved by 670 basis points over the prior year, after a 900 basis point improvement seen in Q3.
So despite increasing gross margins rather nicely, the company's operating margin declined by 23 basis points over Q4 2015. Luckily for the company, there was an improvement in "other income" items by $82 million, and the effective tax rate improved by almost 1,280 basis points. The change in tax rate was a boost to net income of more than $150 million (compared to this year's pre-tax figure and last year's rate), which was more than the increase in operating income over the prior year period.
Amazon's shares currently sit about 5% off their all-time high, so investors may need to rethink their positions. While the company is still growing its top line at a nice clip, it's not growing as fast as thought, and that looks to be pressuring the bottom line moving forward. For a company with razor-thin margins, investors were expecting a lot more, so Amazon definitely disappointed.
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