I have been an Amazon (NASDAQ:AMZN) bull and wanted to wait and see how AMZN traded after Q2 earnings before writing this article. On Friday, 7/30/21, shares of AMZN traded down -$272.33 (-7.57%) as they missed revenue forecasts and guided down from the consensus estimates in Q3 2021. I have tried to consume as much information over the weekend from the analyst community to the AMZN earnings call and press release. Dan Niles, the founder and portfolio manager at the Satori Fund, had shorted AMZN going into earnings, sighting that the weak Prime Day numbers indicated AMZN would fall short of Q2 revenue expectations. Was he incorrect? Absolutely not, as AMZN missed the consensus revenue estimates, and his bet paid off in the short term. Mr. Niles took the risk, bet against AMZN based on the information he had going into earnings, and he was correct.
The questions are, did AMZN have a bad quarter, is the analyst community who derives at the consensus numbers delusional, and what does this mean for AMZN as a long-term stock investment? A common theme in my articles is my criticism about how people invest off of headlines instead of doing the research. AMZN beat EPS estimates by $2.80 and generated $15.12 of EPS in Q2 while generating $113.1 billion in revenue. The analyst community was calling for $115.08 billion in revenue for Q2 2021. AMZN missed their estimate but was it really a miss? In Q2 2020, AMZN generated $88.91 billion in revenue. AMZN just traded down -7.57% because their Year over Year (YoY) increase was $24.19 billion in revenue or 24.2% YoY revenue growth in Q2 2021.
This brings me to the next question about the consensus estimates and how much emphasis should be put on them. These are just estimates or future projections, and just maybe the analysts got it wrong while AMZN got it right. Ask any business owner, manager, or supervisor if a 24.2% YoY increase in revenue is bad, especially on the scale AMZN is producing. These numbers are fantastic, and when AMZN indicates that Q3 will come in at $106-$112 billion compared to $118.72 billion consensus estimates, you have to wonder if the analyst community is setting the bar too high. AMZN is still projecting YoY growth of 10-16% in Q3, which amounts to tens of billions in increased revenue YoY, and it's simply not enough. I will tear the quarter apart and provide an in-depth numbers-driven analysis to illustrate why I believe the analysts got it wrong and why the current sell-off is an opportunity. If AMZN trades lower next week, it could make AMZN one of the best buys in the market.
(Source: Seeking Alpha)
An overview of Amazon's Q2 and the progress it made
If anyone thought AMZN couldn't embed itself deeper into society, they were mistaken. 2021's Prime Day witnessed Prime members in 20 countries purchase more than 250 million items. The back-to-school shopping season also kicked off on Prime Day, and members purchased more than 1 million laptops, 1 million headphones, 600,000 backpacks, 240,000 notebooks, 220,000 Crayola products, and 40,000 calculators. Business Prime has over 1 million customers, including Chevron (CVX) and Citigroup (C). AMZN earned 20 Emmy nominations, and Prime Video landed streaming deals, including the NFL, for Thursday Night Football beginning in 2022. AMZN's streaming TV ads combined with Twitch, their video game streaming platform, now reach 120 million monthly viewers across the U.S. AMZN also announced a six-year collaboration with Ford (F) to embed Alexa into millions of vehicles throughout North America. AMZN continues to strengthen its brand and solidifies itself into becoming a company that consumers can't live without.
AMZN's progress is ultimately correlated to the numbers they announce on earnings calls. AMZN could create the most exciting headlines, but if the top and bottom lines don't improve, there will be blood in the water throughout the investment community. We live in a world where the news cycle runs 24/7 and access to information is instantaneous. Immediately after AMZN announced Q2 2021 results, the headlines about revenue falling short hit the news cycle. Articles about the pandemic boost fading hit the news cycle, and articles were insinuating that AMZN's earnings are the reason why Andy Jassy is now AMZN's CEO.
So what really happened in Q2 2021, and is there any merit to some of the headlines? Yes, the consensus estimate for revenue was $115.08 billion, and AMZN posted $113.1 billion, so it was a miss, but let's take a deep dive into the numbers. In the fiscal year 2017, AMZN posted $37.96 billion in revenue with $197 million in net income. Contrary to what some investors believe, investing in companies that can increase their revenue and profits YoY is good. It drives me crazy when investors are chasing meme stocks with distressed businesses, but that's a different issue. Since the close of Fiscal Year 2017, AMZN has increased its revenue in Q2 by $75.13 billion (198%). Let me put this in perspective for everyone, Target (TGT) generated $92.4 billion in revenue for the 2020 fiscal year. AMZN generated 125% the amount of revenue TGT did in its entire 2020 fiscal year in a single quarter. Over the last four fiscal years, AMZN in Q2 alone has grown its annual revenue by $75.13 billion, which is 81.3% of TGT's 2020's annual revenue. I used TGT as an example because it's a company many who read this article will know, and it's a direct competitor of AMZN.
AMZN's growth is a force to be reckoned with. Since 2018's Q2, AMZN has not seen an annual growth rate of less than 19% YoY. AMZN's average annual growth rate for revenue in Q2 over the past four fiscal years has been 32%. AMZN has gone from generating $37.96 billion to $113.08 billion in revenue in the past four fiscal years in just the second quarter. This is an accomplishment that any company would be ecstatic to report in their earnings results, yet AMZN was punished because of Wall Street estimates. In 2019, AMZN had its lowest growth rate of 19.89% YoY in Q2 over the past four years. If I put an 8% YoY growth rate going forward on Q2 earnings, which is less than half of the lowest AMZN has generated in the last four years, they would generate $153.84 billion in revenue for Q2 2025. Over the next four years, AMZN's annual Q2 revenue would grow by $40.76 billion (36%) at just an 8% annual growth rate. If I drop the growth rate down to 5% annualized, AMZN will deliver $137.45 billion of revenue in Q2 2025, increasing $24.37 billion (24%) over the next four fiscal years. Keep in mind increasing revenue when you are already generating $10 billion a quarter is hard enough, and AMZN is doing it on a scale that almost every company in America could only dream of.
(Source Steven Fiorillo) (Data Source: Amazon)
(Source Steven Fiorillo) (Data Source: Amazon)
(Source Steven Fiorillo) (Data Source: Amazon)
AMZN is an incredible force when it comes to generating revenue, but how about its profits? In Q2 2021, AMZN generated $7.78 billion in net income. Over the last four years, since their $197 million Q2 2017 net income number, AMZN has increased its annual Q2 net income by $7.58 billion (3,848%). In addition to increasing its net income, AMZN is slowly increasing its net income conversion ratio, which is a metric many investors don't look at. The net income conversion ratio is important because it tells investors how much out of every dollar is flowing to the bottom line. In Q2 2017, AMZN had a net income conversion ratio of just 0.52%. Since then, AMZN has increased its net income conversion ratio to 6.88%, retaining significantly more out of every dollar of revenue generated.
If AMZN can keep its 6.88% net income conversion ratio intact, its projections out to 2025 based on my revenue models at a 5% annual growth rate would put their net income in Q2 2025 at $9.46 billion. If I used the 8% model, their Q2 2025 net income would be $10.58 billion. These are astonishing accomplishments, and I am not reading any articles considering these metrics. These are just numbers based on Q2 alone, not the entire fiscal year. More emphasis needs to be put on the actual raw data and realistic projections for the future. AMZN is doing what it should be doing; they generate increased revenue, strengthen their net income conversion ratio, and deliver larger profits. What more can you ask for?
(Source Steven Fiorillo) (Data Source: Amazon)
Was Q2 2021 a miss, or was the analyst community wrong?
AMZN's big miss in the Street's eyes was on revenue, so I will provide an in-depth revenue analysis since 2017. Let's see if AMZN is actually underperforming or if the analyst community made a mistake. All of the numbers used are taken from AMZN's earnings presentations. I am going back to 2017 because this is the earliest year found throughout the presentations on their investor relations website.
(Source Steven Fiorillo) (Data Source: Amazon)
Since Q1 2017, AMZN's revenue has formed a distinct step pattern that increases slightly throughout Q1, Q2, and Q3 before jumping in Q4, which is AMZN's strongest quarter. Each year AMZN's first quarter's revenue is significantly larger than the prior years placing AMZN in a unique position to create new corporate revenue records each year. Over the last four years, AMZN's Q1 total revenue has increased by $72.8 billion, as it has grown from $35.71 billion in Q1 2017 to $108.52 billion in Q1 2021. AMZN Q1 revenue has had an average annual growth rate of 32.52% in the last four years. AMZN continues to set the stage for record revenue years as its Q1 revenue has increased by 203.85% in the last four fiscal years. AMZN has followed this up with similar statistics in their Q2 revenue numbers. In Q2 of 2017, AMZN generated $37.96 billion in revenue. Over the last four fiscal years, AMZN's Q2 revenue has grown by $75.13 billion from $37.96 billion to $113.08 billion, increasing 197.93%. AMZN Q2 revenue has had an average annual growth rate of 31.66% in the last four years.
In the first six months of operations for 2021, AMZN has generated $221.6 billion in revenue. In 2017, AMZN's first six months of revenue amounted to $73.67 billion, and over the last four fiscal years, AMZN has grown this position by $147.93 billion or 200.81%. AMZN has an average annual growth rate of 31.97% when looking at the increase in revenue from its first six months of operations over the last four years.
AMZN has guided that in Q3 2021, they will generate between $106 - $112 billion in revenue, while the consensus was $118.72 billion. AMZN traded down because they missed the consensus in Q2 by $1.98 billion, and they guided under the consensus for Q3. My feeling is that too much emphasis is put on the hypothetical consensus numbers the analysts create when it comes to the world's largest companies. The growth rates and amount of revenue should have more relevance than the consensus numbers. I wish I could have a conversation with the group of analysts that determined the $118.72 billion number for Q3 2021.
I believe the market got it wrong, and an opportunity is emerging when it comes to the share price of AMZN. AMZN missed a hypothetical number, but their actual report was a grand slam. In the first half of 2020, AMZN generated $221.6 billion in revenue, and then for the first nine months, it grew to $258.51 billion. AMZN generated $384.07 billion of total revenue in 2020. Individuals were speculating that the $103.54 billion (36.91%) revenue increase YoY from 2019 - 2020 was a pandemic bump that was unsustainable because people would start going back to physical stores to shop. AMZN's Q1, Q2, and Q3 guidance have proven this theory incorrect. Something I wish people would do is research and understand the e-commerce landscape. Today e-commerce doesn't even account for 20% of total retail sales in the U.S. as it's just above the 15% level. E-commerce is expected to increase to around 19% of total retail sales in 2024, indicating two things. The first is that shopping at physical brick-and-mortar locations is still alive and well, and the second is that there is still a lot of room left for e-commerce sales to close the gap. The country has reopened, and AMZN is still growing. The pandemic advanced the rate of adoption of technology, and people realized that they could save time by ordering many non-essential items online and have them show up within two days.
In the first nine months of 2020, AMZN generated $258.51 billion in revenue. Using AMZN's low projection of $106 billion for Q3 2021 revenue which the Street didn't care for, places 2021's first nine months revenue at $327.6 billion. This increased $69.09 billion (26.73%) YoY in the first nine months of operations. My question becomes, how is this not good enough to move the needle? How many companies can grow their revenue by these amounts YoY in the first nine months? If this occurs, AMZN would have generated 85.3% of 2020's total revenue in the first nine months of 2021, leaving the door wide open for a large record-breaking year.
(Source: Statista)
I will break down AMZN's revenue on a more granular level so everyone can understand where the growth is emerging from. In the first six months of operations from 2017 - 2021, the North American business segment has grown tremendously. AMZN has seen its revenue increase from $43.36 billion in 2017 to $131.91 billion in 2021. This is an increase of $88.55 billion or 204.22% in the last four years. The North American business segment has had an average annual growth rate of 32.43% in the previous four years.
(Source Steven Fiorillo) (Data Source: Amazon)
On the International side, AMZN has seen immense growth for a company that is based in the U.S. Since the first six months of 2017, AMZN's international business has grown from $22.55 billion to $61.37 billion, an increase of $38.82 billion (172.2%) over the last four years. The international business segment has an average annual growth rate of 29.1% over the previous four fiscal years in the first six months of operations.
(Source Steven Fiorillo) (Data Source: Amazon)
Unlike the North American and International business segments, AWS has increased sequentially QoQ since Q1 2017. This is critical for AMZN as AWS is a reoccurring revenue business the same way Services is critical to Apple (AAPL). In 2017, AWS generated $7.76 billion in revenue for the first six months of operations. This has increased to $28.31 billion for the first six months of 2021, increasing $20.55 billion (264.8%) over the last four fiscal years.
(Source Steven Fiorillo) (Data Source: Amazon)
Since AMZN's AWS has sequentially increased, creating a forecasting model is much similar. Since Q1 2017, we have eighteen quarters worth of data to utilize. The AWS QoQ growth rate since Q1 2017 has been 8.61%. If I underestimate this growth rate and use a 5% average quarterly growth rate for the AWS business segment, it would place AWS's annual revenue in 2024 at $109.17 billion. My question would be, what is AWS worth as a standalone business segment generating $109.17 billion of annual reoccurring revenue, that's still growing? If AWS grows at a 6% average growth rate through Q4 2024, its 2024 revenue would be $122.98 billion, and at 7%, it would be $138.4 billion. The 5%, 6%, and 7% growth rate multiple are all possible as the average growth rate is 8.61%. If this type of growth isn't exciting, then what is? Many companies wish they could generate the amount of revenue and growth rates AWS produces and it's currently AMZN's smallest business segment.
(Source: Steven Fiorillo) (Data Source: Amazon)
(Source: Steven Fiorillo) (Data Source: Amazon)
(Source: Steven Fiorillo) (Data Source: Amazon)
(Source: Amazon)
Why Amazon is still a long-term buy, and this sell-off is an opportunity
AMZN has delivered two phenomenal quarters, yet the market hasn't been impressed. The market is misinterpreting AMZN's data, and shares are trading based on headlines. Looking at AMZN's chart since 1/1/21, the S&P 500 has significantly outpaced AMZN growing by 18.91% compared to AMZN's 4.42%. Does this sound like a sell-the-news headline? AMZN's net sales are expected to increase between $106 - $112 billion growing by 10%-16% in Q3 2021? AMZN is forecasting its operating income between $2.5 and $6 billion, assuming roughly $1 billion in costs due to the pandemic.
In the U.S., AMZN has the largest customer base on its app with 150.6 million mobile users compared to the 2nd largest Walmart (WMT) with 76.45 million users. AMZN has created a platform that enables 9.7 million sellers to reach customers globally, with 1.9 million actively selling their goods through AMZN's marketplace. On average, in 2019, small and medium-size businesses within the U.S sold more than 4,000 items per minute through AMZN. AMZN has become a driving force in the world of commerce and, based on its growth rates, will continue to increase its position.
One thing that's being overlooked is automation. In 2020, AMZN employed just under 1.3 million people while generating $386.06 billion in revenue. AMZN operates a capital-intensive business as their cost of revenue was $233.31 billion, and their selling, general & admin expenses amounted to $101.7 billion. These two line items account for 86.77% of the total revenue AMZN produced in 2020. AMZN is no stranger to the benefits of technological advances as they have helped countless businesses in their digital transformation to the cloud. Automation also doesn't need to be associated with the loss of jobs, as every company should have a people-first position. I am suggesting that over the next decade, AMZN should be able to utilize Artificial Intelligence, among other pieces of technology, to become more efficient and reduce its capital expenditures. Based on 2020's revenue, if AMZN could reduce their cost of revenue and selling, general & admin expenses by 1%, it would have amounted to $3.35 billion. Increasing efficiency and lowering costs through automation could become a key driver of organic growth for years to come. Over the next several years, if AMZN can reduce these line items by just 1%, its gross profit margin and operating income will improve and increase the net income AMZN generates.
(Source: Seeking Alpha)
Conclusion
I believe the analyst community got the comps wrong, and AMZN shouldn't be punished for their hypothetical consensus numbers about what may occur in the future. AMZN continues to set the stage for a record-shattering year as their first six months of operations have outpaced 2020 by $57.23 billion (34.82%). If AMZN comes in on the low side of Q3 estimates and matches Q4 2020's revenue in Q4 2021, they would generate $453.15 billion in revenue, an increase of $69.09 billion (17.99%) YoY. AWS continues to increase the amount of revenue it generates QoQ sequentially, and at 5%, which is conservative, AWS will generate $109.17 billion of revenue in 2024. AMZN also has an opportunity to become more efficient over the years through AI, and automation that could generate billions in savings, increasing their gross profit margins, operating income, and net income.
Maybe AMZN continues to sell off, but in my opinion, it shouldn't. AMZN is being punished for the analyst community's mistake, and it could be a significant opportunity for investors who have a long-term mindset. AMZN has a strong possibility of generating $450+ billion of revenue in 2021 and exceeding $500 billion over the next several years. As e-commerce is projected to increase from roughly 15% to 19% of the total retail spend from 2021 thru 2024 and more companies embark on their digital transformation, AMZN is in a prime position to continue its growth trends. If you made it this far, I would love to see your opinions if the sell-off was warranted or if you agree with my analysis that the analysts got it wrong?
