Amazon (AMZN) released fourth-quarter earnings last week and gave investors a mixed-bag to deal with. While the financials are still extremely strong — including continued strong revenue growth, free cash flow growth and Web Services profit — investors pulled back slightly over concern about a decelerating North American ecommerce business, Amazon’s core revenue-generator. While some argue that their entire business is predicated on the success of its core segment, others contend that other segments play an integral role in the company’s ability to offer ecommerce features that rivals cannot. For example, extremely high margins from AWS allows Amazon to cover losses stemming from new or rising markets, as well as loss-leader features.
Though the analyst keeps his Outperform rating, he lowers his “fiscal 2019 sales estimate modestly to account for decelerating top-line trends foreshadowed by the first-quarter guidance.” Carden says top-line growth suggests 10%-18% compared to 31% in 2018, and models “most of the deceleration….to be stemming from the North America division given its scale and a shifting focus from unit growth to services and customer engagement.” Other growth restrictors include “the addition of physical stores in this division, and weakness in the India market (less than 5% total sales),” where new regulation are also “likely weighing on overall growth”
Even as Carden expects revenue to continue decelerating, he says the “offset here is higher margin outlook, driving upside to our 2019 EPS estimate.” Carden points out that Amazon is finally starting to see the benefits of heavier spending in the 2016-2017 time frame, with key leverage on marketing, technology, and general and administrative expenses in 2018. In 2019, the analyst expects “upside to margin stemming from fulfillment and general and administrative expenses.”
While Amazon’s core sees decelerating growth, Carden is nevertheless impressed by its pace and results. But he also points to “higher-margin services businesses including AWS, advertising, and fulfillment,” which “continue to make up more the model, and can drive significant profitability gains moving past a more recent period of higher investment spending.”
Overall, there’s strong agreement over Amazon’s stock among Wall Street analysts. Though this quarter wasn’t their best, Wall Street is still incredibly optimistic on the company moving forward. TipRanks tracking of 37 analyst ratings on the company shows a consensus Strong Buy, with 36 analysts recommending Buy and only one recommending Hold. The average price target is $2,115.44, representing a 31% upside from current levels. (See AMZN’s price targets and analyst ratings on TipRanks)