Amazon Q3 2014 Earnings Review

• Amazon missed revenue and earnings estimates in the most recent quarter.
• Outlook is indicative of sales deceleration even as broader macro indicators indicate that retail sales trends improved or accelerated.
• Amazon’s e-commerce business is reaching market saturation, and investment into new business categories has yet to generate   meaningful contribution in terms of revenue and earnings.
• The holiday quarter outlook fell short of expectations, and hence, full-year revenue figures have to be adjusted lower, and long-term expectations on growth have to be reset.

Amazon_Q3_2014_logo

Investors should be cautious of investing into Amazon (NASDAQ:AMZN) as the company is struggling to generate growth even as it invests aggressively into its core business. The company is expected to report sluggish rates of growth going into the holiday quarter, which will reduce full year revenue expectations. Some of Amazon’s most recent business initiatives like the Amazon Fire Phone, and Amazon Prime Video have yet to generate any profit, and continue to weigh heavily on the cost structure of the company. A combination of factors makes the company a riskier investment at the present moment.

Amazon Q3 2014 Earnings Summary

Amazon reported a fairly lackluster quarter in which earnings fell short of analyst consensus estimates. Also, the company provided a very broad revenue guidance range that fell short of next quarter consensus estimates.

Amazon reported a net loss of $.95 per diluted share, which fell short of the analyst consensus of $.74 loss per share. Revenue for Q3 2014 came in at $20.58 billion, missing consensus analyst estimates of $20.84 billion. Both earnings and revenue fell short in the most recent quarter, which is indicative of maturation in the e-commerce space. Furthermore, investors may have lost their patience as the stock has fallen by 8.34% in the trading sessions following the earnings announcement.

Because Amazon is entering into a protracted investment phase, investors can’t look for the reassurance of dividends or share buybacks. However, investment into the core business in the form of operating expenditures, and CAPEX spend hasn't generated a high revenue growth, which is indicative of falling efficiency. Admittedly, it will take a while before many of Amazon’s infant businesses begin to scale (Amazon Web Services, Amazon Local, and Prime Video). The three businesses are well positioned, have the resources to compete, and are expected to grow considerably over the next five years, but are also capital intensive. Because Amazon doesn’t disclose individual segment operating results in an understandable way, the underlying uncertainty of being an equity holder has increased.

Quoted from Amazon:

Net sales are expected to be between $27.3 billion and $30.3 billion, or to grow between 7% and 18% compared with fourth quarter 2013. Operating income (loss) is expected to be between $(570) million and $430 million, compared to $510 million in fourth quarter 2013.

With Amazon’s reporting range varying by $3 billion, and a midpoint target of $28.8 billion, the guidance fall shorts of consensus estimates at $30.89 billion.

AMZN Revenue chart
Source: Amazon revenue chart by Amigobulls

The deceleration in growth is expected to happen in Amazon’s highest grossing quarter in terms of revenue (fourth quarter holiday season). This runs contrary to broader gains in United States retail sales figures.

Amazon_Q3_2014_us_retail
Source: Ycharts

Broader retail sales statistics saw meaningful acceleration in 2014; which runs contrary to Amazon’s growth trends. Amazon’s ecommerce volume comes from selling electronics and general merchandise. However, digital sales growth has flat lined, which is driven by competing digital market places like Google Play Store, and the Apple Store. The incremental benefit of releasing a separate consumer electronics ecosystem to help supplement digital sales growth has been met with hardly any success, and if anything the Amazon Fire Phone contributed heavily to Amazon’s $437 million quarterly loss in Q3.

Conclusion

Amazon reported one of the worst quarters that we’ve seen in quite a while. While asset managers are extremely familiar with Amazon’s free cash flow metric, and how it likes to justify investment into new businesses, the company usually meets expectations when it comes to top line growth rates. This hasn’t been the case in the most recent quarter, and it’s likely that further deceleration will occur going into Amazon’s highest grossing quarter. Therefore investors should be skeptical of investing into Amazon as further discounting is likely to occur on lower levels of anticipated free cash flow.

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