It is the 20th of November 2019

Amazon Soars Above $1,000 After Smashing Expectations

Amazon has done it again, and following a lukewarm second quarter and with Goldman warning not to get too excited going into earnings, Amazon is back to its short-crushing ways, reporting both revenues and EPS which blew away expectations.  In Q3, Amazon reported EPS of 52 cents, unchanged from a year ago (due to fudging the company's tax rate) and beating consensus estimates of 4 cents, on net sales of $43.7 billion, also well above the $42.19 billion consensus estimate, entirely due to the contribution of AWS.  It was also above the high end of the company's own range, which topped out at $41.75 but did not include Whole Foods, which deal closed on August 28. That said, AMZN EPS expectations as recently as July were $1.09.

Also worth noting, operating income of $347MM is down 36% Y/Y from $575MM a year ago. And yes, it appears Amazon has figured out the IBM trick: its income tax in Q3 2017 was 18.4%, down from 46.6% a year ago.

Amazon highlighted the start to its ownership of Whole Foods by saying Whole Foods generated $21 million in operating income across about a month of sales in the quarter. Revenue from “physical stores,” primarily Whole Foods locations, was $1.28 billion. According to Bloomberg, the results reassured investors that the company can integrate its biggest-ever acquisition of Whole Foods Market "without disrupting its dominating e-commerce performance."

The closely followed AWS segment reported net sales of $4.58 billion, a Y/Y growth of 42% (slightly less than the 43% Y/Y increase last quarter, and well below the 55% growth a year ago), and above the $4.51 billion expected. AMZN reported AWS operating income of $1.171 billion. AWS margin in Q3 was 25.5%, fractionally below the 26.6% reported a year ago. Putting AWS in context, whereas AMZN's total operating income was $347 million in Q3, AWS $1.171 billion. In other words, the rest of the company lost $824 million. While the division has been facing tougher competition from both Microsoft and Google, prompting some concerns about whether the growth can continue on pace, especially amid price wars, so far it has yet to materialize despite a slowdown in revenue AWS growth.

Amazon also highlighted its string of recent hardware launches, including new Echo speakers, updated tablets, and a waterproof Kindle e-Reader.

Looking forward, AMZN sees the following solid revenue and operating income:

  • Net sales are expected to be between $56.0 billion and $60.5 billion, or to grow between 28% and 38% compared with fourth quarter 2016. This compares to sellside expectations of $58.75 billion. This guidance includes approximately 1,000 basis points of impact to our year-over-year growth rate from Whole Foods Market. This guidance also anticipates a favorable impact of approximately $1.2 billion or 270 basis points from foreign exchange rates.
  • Operating income is expected to be between $300 million and $1.65 billion, compared with $1.3 billion in fourth quarter 2016. Sellside called for $1.85 billion so a little weak here.

Jeff Bezos was as usual, quite optimistic:

“In the last month alone, we’ve launched five new Alexa-enabled devices, introduced Alexa in India, announced integration with BMW, surpassed 25,000 skills, integrated Alexa with Sonos speakers, taught Alexa to distinguish between two voices, and more. Because Alexa’s brain is in the AWS cloud, her new abilities are available to all Echo customers, not just those who buy a new device,” said Jeff Bezos, Amazon founder and CEO. “And it’s working — customers have purchased tens of millions of Alexa-enabled devices, given Echo devices over 100,000 5-star reviews, and active customers are up more than 5x since the same time last year. With thousands of developers and hardware makers building new Alexa skills and devices, the Alexa experience will continue to get even better.”

What is notable here is that while Amazon rarely gives any numbers for its devices segment, CEO Jeff Bezos pointed out that the company has sold "tens of millions" of Alexa-enabled devices, although there is a rather wide range.

Despite the company's generous spending ways, analysts have said that high margin streams of revenue like those from its advertising, subscription and credit card businesses are expected to continue to grow and help offset higher spending.

Finally, for all the concerns about AMZN's cash burn, the company reported LTM Free Cash Flow in Q3 of just over $8 billion.

More concerning, after rebounding in mid/late 2015, AMZN's operating margin has once again shrunk and is now just 0.8%, the lowest in 3 years.

After a significant rise in the company's LTM operating margin in the past two years, it appears to have plateaued once again, and is declining on an LTM basis.

Also notable, now that Whole Foods is part of Amazon, the company employed a total of 541,900 (most part-time) workers (a record) as of Sept 30, as global net sales growth rose to 33% in Q3.

Yet despite a few quirks in the quarter, Amazon shareholders are ecstatic, sending AMZN soaring 8% after hours, and approaching its all time highs again, near $1,150 which means Jeff Bezos is once again in the running for world's second richest man.

This in turn has also pushed the entire nasdaq sharply higher.

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