Amazon (AMZN) delivered a relatively solid quarterly earnings report, albeit it wasn’t enough to drive the stock much higher in the after-hour session with a modest +0.73% gain (as of the time writing). However, the quarterly earnings report was still constructive to the growth thesis of Amazon given the on-going ramp of cloud/AWS revenue, and the delivery of astonishing margin expansion versus prior-year, which solidifies the theory that Amazon’s profitability metrics will continue to trend higher whether Amazon wants them to or not.
The company reported revenue of $59.7 billion and dil. EPS of $7.09 representing 17% y/y and 117% y/y growth, respectively. Historically, shareholders of AMZN have preferred aggressive OpEx investment, and less emphasis on profits. Hence, the transition to a more mature growth stock emphasizing earnings growth hasn’t been perceived as positively following the announcement of earnings, ironically.
Notwithstanding, the fact that profits makes modeling financial results substantially easier, it doesn’t change the fact that AMZN shareholders have been resistant to profits in favor of revenue/operating cashflow growth. Despite the inversion of expectations tied to financial results, investors should still perceive the quarter positively.
Amazon’s revenue of $59.7 billion narrowly beat consensus expectations of $59.65 billion, whereas dil. EPS results of $7.09 compared to consensus estimates of $4.72 dil. EPS. Amazon beat dil. EPS expectations by $2.37 representing a 50.2% earnings beat. Despite the massively profitable quarter, the in-line revenue results didn’t merit a substantial bid in the after-hour session.
Amazon reported Q2’19 revenue guidance range of $59.5 billion – $63.5 billion with a growth range of 13%-20% (with consensus expectations for Q2’19 at the high-end of the range at 17.9%). Whereas operating income guidance came in at $2.6 billion – $3.6 billion, which compared to $3.0 billion for Q2’18.
Baird’s top analyst Colin Sebastian released a quick flash summary following the earnings release on Thursday:
At first glance, a good report given some concerns over online spending headwinds, and no change to our positive long-term thesis. Positives include significant margin upside for both North America and Int’l segment (Int’l almost achieved breakeven results), reaccelerating subscription services growth, and continued fulfillment expense leverage. Concerns include further deceleration in paid unit growth (10% vs. 14% in 4Q18) without a significant uptick in 3P mix […] North America revenue of $35.8B (+17% Y/Y ex-FX vs. +18% in 4Q18) was in-line with consensus expectations of $35.1B, while segment operating income of $2.29B was well-above consensus of $1.52B. – International revenue of $16.2B decelerated slightly (+16% Y/Y ex-FX vs. +19% in 4Q18), slightly below consensus of $16.46B (potentially reflecting India regulatory change impacts, UK softness).
Sebastian maintained his price target of $2,100 and Outperform rating on the stock. Investors who listened to Sebastian over the past year have made 25.4 percent on their Sebastian bets, according to TipRanks.
F/X impact will likely worsen, as the USD Index has persistently trended higher for the past 12-months (+10.29%), implying a dollar bull market in an environment where international revenue continues to ramp putting next-quarter results at risk due to the implied impact. Amazon cited a 2% negative headwind from F/X in Q1’19, and with the dollar edging higher, the high-end of the outlook range could be subjected to an additional 3%-5% headwind from currencies alone, hence expectations on revenue will be revised lower among consensus analysts to conform to the more conservative guidance range.
Despite revenue deceleration, profitability will likely ramp at a much faster pace than what consensus analysts can reasonably anticipate (Amazon’s profit metrics are notoriously difficult to model). Hence, it’s not exactly the quarter that investors wanted, as it does move the business towards profitability. Until Amazon makes meaningful cash outlays (satellite constellation, Amazon Go brick-and-mortar buildout, and headcount growth tied to HQ2), profits will continue to ramp at a torrid pace, hence investors should anticipate a profit build-up phase before investment activity returns.