So much for fully reading Amazon’s latest earnings release.
Amazon (AMZN) shares surged about 10% in early trading Friday after the tech giant smashed fourth quarter profit forecasts. A combination of a strong holiday season, a shout out to 150 million Prime subscribers on the earnings release and slight sequential acceleration in sales growth for Amazon Web Services (AWS) did enough to awaken some long hibernating Amazon bulls.
Revenue: $87.4 billion versus $86.17 billion expected
Earnings per share: $6.47 versus $4.11 expected
Lost in the earnings discussion — and subsequent race to push Amazon back above a $1 trillion market cap — are the numerous red flags in Amazon’s report. For instance, AWS sales growth of 34% slowed sharply versus the year ago rate of 45%. Profit margins for the AWS segment fell to 26.1% from 29.3% a year ago.
This is yet another sign that Microsoft and Google are nipping at Amazon’s heels in the cloud business.
Speaking of profit margins, its North America business fell to a measly 3.5% from 5.11% a year earlier. The international division operated at a $617 million loss, relatively unchanged year-over-year. Amazon’s international business racked up $1.7 billion in operating losses last year.
“It wasn’t all blue skies for Amazon [in the quarter],” said Amplify ETFs CEO Christian Magoon on Yahoo Finance’s The First Trade.
Magoon is right.
Pay attention to the near-term
But at least for now, Wall Street appears ready to stay focused on the next five years for Amazon instead of some near-term dark clouds. That’s despite the near-term likely being dotted by periods of pressured margins as Amazon invests in same-day delivery services and offers more competitive prices on AWS. In the minds of Amazon investors, weak profit margins are a sign of investing to widen the lead in the future not a cause for concern.
“We expect the North American retail business, driven by Prime, and AWS to support margin expansion, even as Amazon invests aggressively. We believe the emergence of Amazon's advertising business can support both margin and multiple expansion and take share from GOOGL and FB,” wrote BMO Capital Markets analyst Daniel Salmon in a note to clients. Salmon reiterated his Outperform rating on Amazon’s stock and raised the price target to $2,450.
“AMZN is back to beating quarterly profit estimates, printing upside in the past two quarters and in 10 of the last 12,” said Jefferies analyst Brent Thill. “Q4 was particularly notable, as a combination of low expectations and broad-based strength across each business drove the largest single-day stock move since 3Q17.”
Thill maintained Amazon as his top internet pick for 2020.
All of that is great, but investors shouldn’t be blind to the near-term facts on Amazon.
Amazon’s stock is unlikely to go up in a straight line this year as Friday’s market move would suggest. Investors would be wise to re-read Amazon’s earnings release — understand it remains a business in investment mode amid fierce competition — and place bets accordingly.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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