- Amazon reported its Q4 2014 results after the market close yesterday.
- The company reported earnings per share of 45 cents on revenue of $29.2 billion, beating earnings estimates while missing revenue estimates.
- Our Amazon stock analysis post Q4 highlights the valuation risks associated with Amazon’s stock, reflecting our long term negative outlook on the company.
Amazon (NASDAQ:AMZN) announced its Q4 2014 earnings report after market close yesterday (January 29th). Amazon reported earnings per share (EPS) of 45 cents per share on revenue of $29.2 billion. Amazon stock price gained 12.2% in after-hours trading following the latest earnings release. The post earnings gain in Amazon stock price, inspite of a revenue miss, is proof that investors are seeking earnings growth and are now valuing that over topline growth.
Amazon Earnings Q4 2014: Actual v/s Analyst Estimates
Amazon earnings per share of 45 cents came significantly ahead of Analyst estimates of 24 cents. However, the topline failed to keep up with expectations, as the company missed revenue estimates by 2%.
|in $||Analyst estimate||Actual||Beat/Surprise|
|Revenue (in billions)||29.844||29.328||-1.7%|
Source: Estimize While the company did beat earnings estimates, the estimates have consistently been lowered over the last three months.
Amazon Q4 2014 Earnings Estimates Change
Source: Estimize The estimate stood at 79 cents EPS prior to Amazon earnings report for Q3 2014, which was 76% higher than the actual reported earnings. Wall Street estimates, the benchmark for every company reporting earnings had been lowered by 70% over the last three months. This raises the question whether or not Amazon’s earnings beat is something to cheer about and does it deserve a 12% pop in the stock price? To put things in perspective let’s look at the performance in relation to the Q3 2014 performance.
Amazon Earnings Summary Q4 2014
Let’s analyze Amazon’s latest quarterly numbers in relation to the Q4 2013 performance.
|Q4 2013||Q4 2014||YoY change|
Amazon’s revenue growth rate for Q4 was the slowest reported YoY growth in the last 10 quarters (and probably the slowest growth in its history). While this is understandable as comps are getting tougher, what is worrying is that the 15% YoY revenue growth is significantly lower than 20% reported in Q4 2013 and also in Q3 2014. The revenue growth adjusted for Forex changes implied an 18% YoY growth, which is again lower than its Amazon’s historical run rate.
Amazon Revenue Growth Chart (YoY)
It is surprising to see that the market hasn’t taken notice of this or has chosen to ignore this considering that revenue growth was the only metric it cared about only a few quarters ago. This could probably be attributed to the fact that, had it not been for the forex headwinds, Amazon would have landed revenue on the higher side of estimates. However, it is also interesting to note that the revenue estimates had been lowered by 4% over the last three months. The Q4 2014 revenue estimate stood at $31.03 billion on Oct 22, ahead of Amazon’s Q3 earnings report. Had it not been for the lowered estimates, Amazon’s FX adjusted revenue would have also fallen short of estimates.
Amazon Profit Margin Analysis
Amazon registered a 3 percentage point improvement in gross margins, which was helped by higher third party sales and AWS revenue growth. Apart from helping gross margins, faster growing third party sales could also be the culprit behind the revenue miss. The operating margin stayed flat from the year ago quarter while the net margin declined by 20 bps. The 3 percentage point improvement in gross margins was negated by a 42% rise in Technology and content expenses, a 35% rise in marketing expenses and a 39% increase in general and administrative expenses (G&A).
|Costs growth||Q4 2013||Q4 2014||YoY change|
|Cost of sales||18806||20671||9.9%|
|Technology and content||1862||2635||41.5%|
|General and Administrative||318||442||39.0%|
Fulfillment expenses growth slowed to 17% from 30% in Q3 2014. The slowdown in fulfillment expenses was directly impacted by a 65% growth in number of merchants using FBA (fulfillment by Amazon) service, which led to a 50% growth in shipping revenue. The 50% rise in shipping revenue significantly offset a 30% rise in shipping costs, leading to slower growth in fulfillment expenses. The net impact of forex headwinds, topline slowdown and flat operating margins resulted in a 12% decline in earnings. It is surprising to see investors cheer a decline in earnings with a 12% pop in stock price.
Amazon Q4 2014 Cash Flow Analysis
Amazon ended Q4 2014 with Cash and cash equivalents of $17.42 billion, a $4.97 billion or 40% YoY increase over Q4 2013. The rise in cash balance can be attributed to a $5 billion increase in Amazon’s long term debt. TTM cash flow is an appropriate measure to track the cash flow movement of Amazon considering the cyclical nature of their e-commerce business. The company generates a bulk of its free cash flow dollars in Q4 due to the Christmas shopping season. The TTM free cash flow decreased to $1.95 billion, putting the TTM free cash flow margin at 2.9%, a 10 bps contraction over Q4 2013. The decrease in free cash flow was a staggering $2.35 billion after accounting for capital acquired under capital leases and finance lease repayments. Making these adjustments Amazon free cash flow margin came in at -7.5%.
Amazon Inventory Turnover Ratio
Inventory turnover ratio is one of the key metrics for any retailer. Amazon presence in the e-commerce space merits a deeper look at this metric, which has long being claimed as the proof of Amazon’s efficiency vis-à-vis physical store retailers. Amazon’s Inventory turnover has been in a state of decline over the last few quarters and the decline continued in Q4 2014, with an Inventory turnover (TO) ratio of 98.6 against an inventory TO ratio of 8.9 in the year ago quarter.
Amazon missed the lowered revenue consensus estimate of $29.84 billion while beating the hugely lowered EPS consensus of 24 cents per share by a huge margin, with actual EPS coming in at 45 cents. The after-hours trading activity defies rationality as investors ignored a significant slowdown in revenue and a YoY decline in earnings. Amazon continues to remain a case of irrational exuberance. Betting against this stock could leave you burnt as the stock has proven time and again that its ability to stay at irrational valuations could be far longer than you could stay invested. Our Amazon stock analysis pinpoints the concerns surrounding the stock and reflects our long term negative outlook on the company.
Amazon Earnings Preview
-- Amazon Q4 2014 Earnings Preview (published on January 20, 2015)
- Amazon is expected to report its Q4 2014 earnings on January 29th after market close.
- Analysts expect the company to report earnings per share of 23 cents on revenue of $29.94 billion.
- The Fire Phone inventory write off will once again be a major drag on the bleeding bottomline, and could lead to another earnings miss.
Amazon is set to report its Q3 2014 earnings on January 29, after market close. The Amazon earnings report will be for the fiscal quarter and Financial year ending December 2014. Amazon stock price fell by 22.8% through 2014, significantly under-performing the 15.4% gains of NASDAQ and the 13.2%rise in S&P 500. The fall in Amazon stock price was fueled by large revenue and earnings misses through the 4 quarters reported in 2014. Dismal performance marked Amazon's Q3 earnings with the company missing out on estimates. Both Amazon revenue and Amazon earnings fell short of expectations. To add to the misery of investors, the outlook for the holiday quarter which has always been the best quarter for the company, fell short of expectations too. After writing-off $170 million of Fire Phone inventory in Q3 2014, Amazon still had $83 million of the phone inventory, a major red flag heading into Q4 2014. A write off this quarter could potentially lead to another big earnings miss. The company's e-commerce business is reaching saturation while its non-core segments like cloud solutions face stiff competition from cash rich competitors like Google and Microsoft. Its latest initiatives like the Amazon Travel, Kindle Fire and Prime Video are yet to pay off. While the Kindle Fire contributed heavily to Amazon's Q3 losses, the 10 million prime membership trials in Amazon's holiday season could potentially be disastrous to Amazon's bottomline with reports of repeat trials and abuse of such trials.
Amazon Earnings: Management Guidance For Q4
Amazon’s management had, in Q3 2014 conference call, issued the following guidance for Amazon Q4 2014:
- Revenue between $27.3 billion to $30.3 billion, implying a YoY growth of 7% to 18%.
- Operating Income or loss to be between $570 million loss and $430 million.
The guidance at the mid-point would imply a 12.5% YoY growth in revenue, while the operating Income (midpoint) implies a $580 million fall from the year ago quarter.
|Guidance midpoint||Q4 2013||YoY growth|
Amazon Earnings - Q4 Analyst Consensus Estimates
Analyst revenue and earnings consensus estimates for Amazon Q4 earnings are summarized in the accompanying table.
|Analyst Consensus||Q4 2013||implied growth (YoY)|
|Revenue ($, in millions)||29938||25590||17%|
|Non-GAAP EPS ($)||0.23||0.51||-54.9%|
Source: Estimize The analyst consensus estimate is near the higher end of management guidance suggesting analyst expectations of a strong holiday performance by the company. The current consensus estimate implies a 17% year on year (YoY) revenue growth accompanied by a 55% decline in earnings per share. According to Estimize, the Amazon EPS consensus estimate for Q4 2014 is $0.23. The reported Amazon EPS for the same quarter last year was $0.51. Source: Amazon stock chart by Amigobulls
Amazon Earnings History
Amazon has a very poor earnings history over the last 12 quarters. The company has missed analyst consensus revenue estimates in 8 out of the 12 quarters. On the earnings front, the company has done marginally better, reporting a miss in 7 out of the 12 quarters while reporting in-line earnings for one quarter. The company has an average revenue miss of 1% while missing earnings estimates by 2 cents on an average. However, the company has missed earnings estimates by 12 cents on an average over the last 4 quarters. This is a huge miss considering that the average earnings estimate over the last 4 quarters has been just 1 cent per share.
Strong 3P Sales At Amazon In Q4 2014
ChannelAdvisor has historically provided a preview into Amazon’s third party sales. Third party sales registered strong sales throughout Q4 2014, with an average growth rate of 30%. Amazon CFO Tom Szkutak had mentioned in Q2 conference call, “And in terms of the third-party units as a percentage of total units, you're right that's 41% this quarter. It's up about 100 basis points.” In another earlier post on wired.com regarding the firm's third party sales, ChannelAdvisor CEO scot Wingo said,” Amazon divides its sales into two big categories — media and “electronics and other general merchandise.” The bulk of third-party sales fall under the second category, Wingo says, where products have a higher average price.” 40% units with a higher ticket price could effectively mean over 50% of GMV processed on Amazon could be from third party sales. A 30% YoY growth in third party sales could in effect mean substantial growth in Amazon’s topline in Q4. However, after the massive failure of the Fire phone, the write off of inventory and its impact on the company's bleeding bottomline will be something investors should watch out for in the upcoming Amazon earnings release.
While strong growth in Same Stores Sales could propel Amazon ahead of analyst revenue estimates, the write off the Fire phone inventory will weigh down on Amazon’s already bleeding bottomline. Low profit margins and Amazon’s high P/E ratio remains a major concern for investors. Amazon’s high valuations and low profitability represent a serious risk to investors, which is reflected in our Amazon stock analysis.