Amazon posted 4Q18 results on Thursday (31 January), with earnings coming in at $6.04/share (+ % YoY) vs the Refinitiv consensus estimate of $5.68/share, while revenue rose 19.7% YoY to $72.4bn vs a $71.9bn Refinitv estimate. While 4Q18’s revenue rise (+19.7% YoY) was faster than the 18.8% YoY growth expected, it was nevertheless still the slowest growth since 1Q15. Amazon ended FY18 with $232.9bn in revenue, passing the $200bn milestone for the first time.
Although the results (backed by strong holiday sales) beat expectations across the board the company’s 1Q19 guidance (and concerns around slowing growth) disappointed the market resulting in the share price dropping 5%-plus in after-hours trading. This after the firm warned of increased investments in 2019 and forecast net sales of between $56bn and $60bn for 1Q19, missing Refinitiv consensus analysts’ estimates of $60.77bn.
In terms of its various businesses, the cloud-computing arm, Amazon Web Services (AWS) remained Amazon’s profit and growth driver, helping produce record profits for a third consecutive quarter – Amazon generated $3bn in net income, up 66% YoY. AWS’ revenue jumped 45% YoY coming in $7.43bn vs the Refinitiv estimate of $7.3bn, while operating income here increased 61% YoY to $2.18bn. This was the first time Amazon provided a YoY number on Whole Foods, which saw its growth rate dropping to 18% YoY from 42% YoY in the year-ago period. Revenue at whole Foods rose c. 6% YoY. Meanwhile, international sales growth slowed (to 15% YoY vs the previous year’s 29% YoY growth rate) with India being a notable challenge for the company, although Amazon didn’t provide much clarity about what to expect from here, according to CNBC. New regulations in India seek to protect local businesses by prohibiting foreign e-commerce companies from selling products via vendors in which they have an equity interest. Amazon’s “Other” segment (mostly comprised of its advertising business but also including other services offerings) gave it a profit boost – revenue jumped 95% YoY to $3.4bn.
In the results release, CEO Jeff Bezos also highlighted the success of Amazon’s Alexa voice-assistant noting that “Echo Dot was the best-selling item across all products on Amazon globally, and customers purchased millions more devices from the Echo family compared to last year.”
Looking ahead, Amazon said that it expects revenue to come in between $56bn and $60bn, slightly below the $60.8bn the FactSet consensus estimate.
The Amazon story is largely unchanged for us and we highlight the following:
1) Revenue growth is robust but decelerating sequentially (base effects); and
2) Operating profit is growing faster than revenue due to: i) mix shifts (higher-margin segments growing faster); and ii) a combination of scale economies and efficiency gains. After years of investments in people and infrastructure, Amazon is starting to reap material efficiency gains. Operating leverage is driving profitability higher. Amazon will continue to invest aggressively in future projects, but we’ve reached an inflection point, where Amazon’s ability to generate profit will exceed its ability to reinvest in the business.
In 2019 and beyond, we expect that these factors will still be in play, but to a greater or lesser extent depending on how aggressively the firm reinvests in the business. At a minimum, we think the days of “But Amazon doesn’t make any money” are behind us.
As mentioned above, Amazon’s share price fell on the back of these results – possibly also a combination of ‘soft’ 1Q19 revenue guidance and management’s intention to accelerate spending again. We don’t share this view: Amazon has successfully reinvested in the business for 20 years, and to quote Jeff Bezos, “It’s still day one” in terms of the opportunities available over the next 20 years.
We have been fairly sanguine about the short-to medium-term threat Amazon poses to logistics providers. However, the following comments from Amazon have shifted our view at the margin. Knowing the company’s tendency to only provide sparse commentary, we wouldn’t be surprised if it is sending a signal ahead of fee negotiations with US Post, UPS, FedEx etc.: “What we like about our ability to participate in transportation is that a lot of times we can do it at same costs or better, and we like the cost profile of the two. We can also invest selectively because we have more perfect information. We know where our demand is, we know where we’re moving things between warehouses and sort centres, and by not involving third parties all the time, we found that we can extend our order cut offs and we’ve done that over the last few years. So that’s another helpful side benefit for consumers when we are doing our own transportation final delivery.”
This brings us to an important general conclusion: The major platforms have reached a stage where their supply chains are increasingly being commoditised. Individual players are largely indistinguishable from one another – forced to compete on cost and service delivery alone. The data advantage endemic to the platforms – as well as their ability to integrate across a range of products and services (e.g. first-party, marketplace, entertainment, cloud, logistics, payments etc.) – is likely to accelerate the process.