- Amazon is expected to report its Q1 2014 earnings on April 24 after market close.
- The Q2 2014 guidance will be crucial since it will negate the impact of the artificial boost from Amazon’s eBook accounting policy change.
- Any slowdown in growth will be severely punished, given the high valuation enjoyed by Amazon.
Amazon (NASDAQ:AMZN) is expected to report its Q1 2014 earnings on 24 April after market close. The quarterly results will of particular interest considering that Q1 will be the last quarter of revenues boosted by an eBook accounting policy change. The guidance for next quarter will be hugely significant as Amazon faces an uphill task to outperform investor expectations of growth. Amazon has historically chased growth at the cost of profits; will Amazon transition to an earnings focused model? Will the transition be a successful one? These will key questions on investors’ minds as we head into the ER. Our Amazon Q1 2014 earnings preview looks into what to expect from the e-tailer in its latest quarterly results.
Amazon: Slowing topline
The last few quarters have seen amazon’s topline growth decline. A look at the topline growth over the last few quarters (in the chart below) shows the clear decline in revenue growth that is currently in play at Amazon.
The company registered 22% Y/Y growth in FY 2013 compared to the 27% topline growth in 2012. The slowdown in growth is even more worrisome when you consider the eBook revenue accounting policy change made by the company in early 2013. Under the new policy change, Amazon accounts for the entire value of the eBook as revenue whereas it was earlier accounting for only its commission share as revenues. The net result was an inflated revenue growth over the last three quarters, making the revenue and revenue growth rates incomparable to the earlier quarters. The fact that Amazon has seen significant dip in its topline growth rate raises the question of what is the size of the eBook category and what will be the topline growth Amazon will churn out once the inflated impact is negated in Q2 2014. This is precisely why the topline guidance given in Thursday’s ER could well be a huge point of focus.
Earnings focused approach
In a scenario where the strategy of chasing topline growth seems to be faltering, Amazon could transition to a model with a greater focus on earnings. There have been signs of Amazon scratching around for ways to pass on costs to customers in the form of hikes in Amazon prime fees, increasing the minimum amount to qualify for free shipping. These are developments which were never heard of at the growth-focussed amazon.com. Has the strategy of chasing topline growth finally caught up with Bezos and his team? The Q1 2014 results will provide greater detail behind the rationale of these decisions and also the negative impact of these on the customers of Amazon, who have got so accustomed to the customer-pampering ways of Amazon. Can the transition to a earnings focussed model result in a backlash? Probably yes, but better now than later.
|Q1 2013||Q1 2014 analyst consensus||Y/Y change|
|Revenue (in billions)||16.07||19.42||20.8%|
According to streetinsider.com, the analyst consensus estimate for Amazon is earnings per share (EPS) of 23 cents (+28% Y/Y) on revenues of $19.42 billion, implying a revenue growth of 21% on a Y/Y basis. Amazon management has guided revenue in the range of $18.2 billion - $19.9 billion, representing a Y/Y growth of 18% at its midpoint. The company has missed analyst consensus estimates for revenue in three of the last four quarters.
Amazon’s Q2 2014 guidance will be in focus as the accounting change ceases to artificially boost topline growth from Q2 2014. Amazon’s possible transition to an earnings focused model and the managements views on the price sensitivity of its customers will be addressed to a significant extent in this ER. Any slowdown in topline could be a sore spot for Amazon investors, given the growth currently priced into the stock at a price-to-earnings multiple of 560 and price-to-sales multiple of 2. We at Amigobulls have always highlighted the concerns surrounding the insane valuation of Amazon. We continue to be bearish on Amazon and rate it low at 2.2/5, mainly due to its valuation concerns. Keep reading for our latest update on Amazon post Q1 2014 earnings release.
To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)