- AMZN reported Q3 revenue of $110.81 billion and $4.9 billion of operating income which was within its forecasted range from Q2 yet Q3 is being classified as a miss.
- Cloud services infrastructure is expected to grow more than $1 trillion in annual spending over the next 9 years and AWS has 33% of the market.
- AMZN is spending more in CapEx than MSFT, WMT, TGT, COST, FDX, and UPS combined as they invest heavily to drive future growth in e-commerce and cloud services.
- I believe AMZN will become the first $1 trillion annual revenue company, and the amount of cash flow their current investments will generate in the future is going to be immense.
What on earth does Amazon (NASDAQ:AMZN) have to do for the market to get excited about them again? Once they reported on 10/28/21, the headlines began to surface that "Amazon badly misses on earnings and revenue" and "Amazon Q3 earnings misses estimates on EPS and revenue." The same negative headlines occurred in Q2 when AMZN delivered a great quarter to the street. It's deja vu and the analyst community that comes up with the consensus should consider what the forecasts from AMZN were in Q2. I am confident that AMZN's management team knows more about AMZN's business than anyone reading through the annual 10-K, quarterly 10-Q reports, or listening to earnings calls.
In Q1 2021, AMZN guided Q2 2021 revenue to be between $110.0 billion and $116.0 billion, or to grow between 24% and 30% compared with the second quarter of 2020. AMZN also forecasted their operating income to come in between $4.5 billion and $8.0 billion. When 7/29/21 came around, AMZN reported Q2 numbers of $113.1 billion in revenue and $7.7 billion of operating income shares sold off, and headlines read that AMZN missed on revenue. In Q2, AMZN delivered in the middle of their forecasted range on revenue and the upper range for operating income, yet the quarter was deemed a miss, and shares sold off immediately by -7.57%. I wrote an article after Q2 defending AMZN as they got the quarter correct and the consensus estimates got it wrong. If AMZN delivered $109 billion in revenue, call it a miss even though YoY still would have been tens of billions in revenue growth YoY, but don't classify it a miss when AMZN delivers within their forecasted range.
So what just happened? AMZN had forecasted revenue of $106-$112 billion and operating income of $2.5 - $6 billion for Q3 2021. On 10/28/21, AMZN reported revenue of $110.81 billion and $4.9 billion in operating income. Here is a news flash, AMZN didn't miss earnings. $110.81 billion is in the upper range of their forecast from Q2, and it was a 15.3% YoY increase in revenue. Media outlets and analysts just classified a quarterly YoY increase of $14.67 billion (15.3%) in revenue which came in on the high end of the forecast as a miss. What on earth does AMZN need to do to impress people these days? Companies would be ecstatic, generating a $14.67 billion revenue increase over several years, and AMZN just did it in a single quarter YoY. The same can be said for operating income as AMZN gave a range of $2.5 - $6 billion for Q3 2021 and delivered $4.9 billion in operating income, yet it was a miss. What could be even more ridiculous is that AMZN's guidance for Q4 was disappointing. We now live in a world where AMZN delivers a forecast of revenue between $130 - $140 billion in Q4, and it's not enough. In Q4 2020, when the impacts of the pandemic were more severe than present-day, AMZN generated $125.56 billion in Q4 2020 revenue. AMZN is expecting to grow its Q4 2021 revenue YoY between 4-12%, and people are actually saying AMZN is being impacted by consumers returning to physical stores. Once again, Mr. Market is getting it wrong, and if shares continue to sell off, I will be viewing this as a great opportunity.
(Source: Seeking Alpha)
Amazon is still growing in every business segment, yet reports are coming out that they are being impacted by consumers going back to physical stores
My biggest pet peeve is that so many people fire from the hip without digesting the information. We live in a period where access to information is instantaneous, and people feel as if they need to be first with an opinion. I wish people would actually tear through the numbers and understand the progress that's occurring.
Over the past four years, AMZN has increased Q3 revenue by $67.07 billion (153.31%), growing from $43.74 billion in Q3 of 2017 to $110.81 billion in Q3 2021. If this was almost any other company and they reported that their annual revenue growth was $67.07 billion over the past four years, it would be celebrated. Look at Tesla (TSLA); TSLA has increased its annual revenue by $35.09 billion over the last four years as it grew from $11.76 billion to $46.85 billion. Everyone wants to make a huge deal about how much growth TSLA is achieving, and I am not diminishing TSLA's success as it's incredible, and I wish them much success in the future. It is becoming very frustrating that while TSLA's $35.09 billion of annual revenue growth over the past four years is celebrated, AMZN's revenue growth is seen as a miss. Over the past four years, just in Q3, AMZN has generated an additional $31.98 billion (91.13%) in revenue growth compared to TSLA on a full-year basis in the same period. So the headlines read AMZN missed on revenue when they came in at the higher end of their forecast, and in a quarterly period, they have grown more than one of the most beloved growth companies in the market has done on an annual basis over the past four years. This is crazy, and people need to pay more attention to the numbers.
(Source: Steven Fiorillo) (Data Source: Amazon)
Over the past four years, AMZN has delivered an average Q3 growth rate of 26.42%. While AMZN has delivered its 2nd largest revenue increase QoQ in the last four years, its revenue growth has slowed to its lowest percentage increase at 15.25%. Hypothetically if growth continues to slow down QoQ to an average rate of 6% through 2025 in Q3, AMZN would end up growing its Q3 revenue by $29.09 billion over the next four years. At a 6% growth rate, AMZN's Q3 revenue would be on track to generate $139.9 billion in Q3 of 2025. If AMZN was to squeeze another percent out of this hypothetical growth and grow at 7% over the next four years in Q3, it would generate $145.5 billion in revenue in Q3 2025.
(Source: Steven Fiorillo) (Data Source: Amazon)
AMZN has continuously grown its revenue in each of its business segments in Q3 YoY, yet many headlines have diminished AMZN's accomplishments. In the North American sales segment, Q3 revenue has grown by $6.18 billion (10.42%) YoY, while in the past five years, it's grown by $46.68 billion or 247.34%. In International sales, Q3 revenue has increased by $3.97 billion (15.79%) YoY and by $18.54 billion (174.72%) in the past five years. AWS has been growing into a huge revenue center as in Q3 it grew by $4.51 billion (38.87%) YoY, while in the last five years, Q3 revenue has increased by $12.88 billion (398.61%).
(Source: Steven Fiorillo) (Data Source: Amazon)
The talk of AMZN's revenue being impacted by people returning to physical stores is ridiculous. Yes, from Q2 2021 - Q3 2021, revenue declined by 2.01% as AMZN generated $2.27 billion less in revenue QoQ. This shouldn't worry anyone in the slightest. In 2020 AMZN posted a record year of revenue as they generated $386.06 billion. So far, in 2021, AMZN has delivered $332.24 billion of revenue thru the first nine months. The low end of AMZN's Q4 projection is $130 billion. If AMZN comes in on the low end at $130 billion, its 2021 revenue will amount to $462.41 billion. This would be a YoY revenue increase of $76.35 billion or 19.78%. Does this look like a company that is being impacted by consumers going back to brick-and-mortar locations? To put this in perspective, Target (TGT) has generated $99.04 billion of revenue in the past twelve months. AMZN is on track to grow its revenue in one year by 77.09% of what TGT generates in a year. AMZN didn't miss on revenue, and its growth is very healthy.
Why I am not freaking out about a decrease in net income and free cash flow
A lot of people don't like doing the homework and tearing through the numbers. Unlike many people, I read through the entire financial history of a company and compare it to their peers. AMZN's capital expenditures (CapEx) have increased substantially over the past two years. In recent years they would grow modestly as AMZN increased in size, but in 2020 CapEx grew by $23.28 billion (138.06%) YoY, and in the TTM, CapEx has grown by another $16.8 billion (41.86%). Many people would freak out over this and automatically assume that it's getting more expensive to run the business.
CapEx is different than the cost of revenue and operating expenses. Capex is capital that is allocated to purchasing, upgrading, or extending the life of an asset. Capex is used to invest in the long-term financial health of a company. Capex can refer to purchasing property, equipment, land, computers, software, or other items viewed as long-term investments with a shelf life greater than one year. AMZN is heavily investing in their company, and I am fine with it. Long-term shareholders will remember that the biggest complaint was that AMZN would generate tons of revenue and wouldn't generate a profit. In 2014 AMZN generated $88.99 billion in revenue, and at the end of the day, its net income was -$241 million. Jeff Bezos would always say AMZN is investing in itself and can turn a profit whenever it chooses to do so. Then all of a sudden, AMZN generated $596 million in profit, then $2.37 billion, $10 billion, and eventually, in 2021, $26.26 billion of net income in the TTM. Even though QoQ AMZN's net income dropped from $7.78 billion to $3.16 billion, it's still at $19.04 billion in the first nine months of 2021 compared to $14.11 billion in the same period in 2020. Don't let one-quarter of fewer profits worry you, especially when AMZN is up to $4.93 billion (34.96%) compared to 2020's first nine months for net income.
Who are AMZN's competitors? I would say Walmart (WMT), Target (TGT), and Costco (COST) on the retail side. On the logistics side FedEx (FDX) and United Parcel Service (UPS), and in cloud services Microsoft (MSFT). Between WMT, TGT, COST, FDX, UPS, and MSFT, their CapEx in the TTM have amounted to -$47.7 billion. AMZN has spent -$56.94 billion on CapEx in the TTM, which is an additional $9.24 billion (19.38%) than these six companies combined. AMZN is investing heavily in its future and is still generating a healthy profit. When I look at AMZN's track record, they deliver on everything they set out to do. They have arguably the best supply chain outside of the Department of Defense, the best online marketplace, and the largest cloud service provider. I am expecting that the heavy investments in CapEx will lead to future revenue, cash from operations, and profit growth. Keep in mind that as these investments pay off and AMZN's CapEx decreases, their FCF will increase substantially.
(Source: Steven Fiorillo) (Data Source: Seeking Alpha)
My oh my, Amazon is taking market share in the cloud
In Q2 2021, the worldwide cloud infrastructure services spend amount to $47 billion. The top three cloud service providers accounted for 61% of the spend in Q2, and AWS was the largest revenue generator with a 31% market share. Trailing AWS was MSFT in 2nd place with 22% of the market and Alphabet (GOOGL) with 8%, rounding out 3rd place. In Q3, cloud infrastructure services spending increased to $49.4 billion, and AWS took 1% of the market share away from MSFT as it increased to 32% and MSFT decreased to 21%. According to Gartner and verified by Canalys, AWS is the leader in the cloud infrastructure space.
The global cloud service market is expected to reach $1.62 trillion at a 15.8% CAGR by 2030. In the first nine months of 2021, the worldwide cloud infrastructure spending amounted to $138.2 billion. AWS has 81 availability zones within 25 geographic regions worldwide and has announced plans to add 24 additional availability zones and 8 more regions to extend its global cloud infrastructure. In the future, Australia, India, Indonesia, Israel, New Zealand, Spain, Switzerland, and the United Arab Emirates will all be part of the AWS global cloud service market. AWS Global Cloud Infrastructure is the most extensive cloud platform, offering over 200 fully-featured services from data centers globally, serving 245 countries and territories.
Hypothetically, I will speculate and say that the global cloud service market ends 2021 at the high end with $200 billion spent. This still leaves $1.42 trillion left in projected growth over the next nine years. Even if the projection is on the high end, for argument's sake, I will chop off $420 billion and work with $1 trillion of cloud infrastructure growth remaining for the rest of the decade. Go back and look at AMZN's CapEx for a moment; they are outspending all of their main competitors combined. MSFT is the 2nd largest cloud infrastructure player, and their spending $21.53 billion in CapEx while having many other business segments. AMZN could be allocating $21.53 billion in CapEx just to AWS, for all we know, which is entirely possible. Even if AMZN maintains a 32% position in the cloud market going forward, this will generate $384 billion of annual revenue in 2030, which would most likely be reoccurring YoY and possibly still increasing. This is exactly why the drop in FCF doesn't matter today. AMZN is positioning itself for the future. As AMZN allocates over $56 billion in capital to CapEx in 2021, my money is that AMZN's capex will drive revenue, cash from operations, FCF, and net income into the future.
Global Network of AWS Regions
Ecommerce is still a fraction of the retail sector with substantial growth in its future
The global e-commerce market is expected to account for $4.89 trillion of total retail sales in 2021, according to Shopify (SHOP). As 2021 comes to a close, we're roughly 3 years and 2 months away from e-commerce, expanding to $6.38 trillion and accounting for 21.8% of retail sales. This is where I disagree with the articles I read saying AMZN is feeling pressure from consumers going back to physical stores. E-commerce is still a fraction of the overall retail sector and has tremendous growth potential. I would argue that AMZN is becoming more of a threat to physical retail locations as we progress throughout this decade.
Over the next three years, e-commerce is expected to grow by $1.5 trillion in sales and increase its share of retail sales by 2.3%. At the close of 2024, e-commerce will still account for less than 1/4th of total retail sales. Here is what people need to come to grips with, millennials are estimated to have the most spending power and will continue to have the most spending through this decade and well into the next decade. Gen Z, which is classified as anyone born between 1997 - 2012 (ages roughly 7-22) will see the fastest incline of spending power over the next decade and will overtake baby boomers around 2024 and Gen X around 2033. Gen Z will never know life without connected devices and are more focused on allocating their time than any other generation I have seen. I believe the combination of Gen Z aging and their spending power increasing, millennials adapting to technological changes and having the most spending power, and technology making life easier for Gen X and baby boomers will all lead to e-commerce continuing to take market share away from physical sales at brick and mortar locations. At the end of the day, e-commerce is still a young market, and as each percentage point it takes away from traditional retail sales is worth roughly $650.87 billion, there is tremendous growth potential for AMZN.
(Source: World Data Lab)
I am staying long AMZN, and I am not leaving my position because the naysayers are wrong. This is the 2nd quarter in a row where AMZN provides guidance, delivers within the range it provided the prior month, and the results are classified as a miss. Can you imagine forecasting for revenue to come in between $106-$112 billion in a single quarter, deliver $110.81 billion, increasing 15.3% YoY, and then be told you missed by $850 million? It's utterly ridiculous, and if people on the sidelines get a better entry point, AMZN is a buy. AWS took market share away from MSFT in Q3 and now has 32% of the cloud infrastructure sector, which still has over $1 trillion of growth companies will be fighting over throughout this decade. In the next three years, $1.5 trillion will find its way to the e-commerce sector in the form of new sales. AMZN is outspending all its major competitors combined on CapEx and is positioning itself to grow considerably for years and years to come. I have said it before, and I will say it again, I believe AMZN will become the first $1 trillion annual revenue company, and the amount of cash flow their current investments will generate in the future is going to be immense.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN, GOOGL either through stock ownership, options, or other derivatives. 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.
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