Despite revenue miss and below par Q1-2017 guidance, AMZN stock is still a good long-term bet.
Seattle, Washington-based Amazon.com, Inc. (NASDAQ:AMZN) missed revenue estimates in its latest quarter, reported on Feb 2nd after the bell. Amazon had posted a revenue of $43.7B which grew 22% YoY but missed analyst estimates of $44.67B. However, the e-commerce retail giant delivered a big earnings surprise of 14% by posting an EPS of $1.54 against the Street's expectation of $1.35. Amazon posted a massive YoY earnings growth of 54% in Q4. Shares of Amazon were down by about 4% immediately after the company reported its latest earnings. In spite of the revenue miss, the company is still in hyper-growth mode. The company's guidance for this quarter also fell short of analyst expectations. If you keep analyst expectations aside, AMZN stock is still a great long-term buy. Here's why.
Q1 Guidance Below Expectations Not A Reason To Worry
In Q1-2017, the management expects revenue to be in the range of $33.25B- $35.75B, implying 14% to 23% YoY growth. The Street had expected a revenue of $35.95B in the next quarter. The company cited forex headwinds for the lower than expected guidance. Amazon also issued a disappointing outlook for operating income, as Amazon guided for operating income to be in the range of $250M and $900M this quarter, compared to $1.1B in Q1-2016. The recent revenue miss coupled with lower than expected guidance saw a flurry of analyst price target cuts even though there was no change in AMZN stock ratings by analysts.
As a long-term investor one should note that the guidance being below expectations is not due to any fundamental flaw with the business of Amazon. Many see this "lower revenue growth as a form of investment, meaning, discounting to take market share". Also, CFO Brian Olsavsky stated in the earnings call that "the continuation of the step-up investment [observed] in the second half of last year" was one main reason for below par operating income guidance for this quarter. One could expect profitability to rise in the long-term, once the investment cycle is over. However, there would be short-term disappointments but you need to believe in CEO Jeff Bezos' vision and his record to date.
AWS Juggernaut Will Continue To Roll
Amazon's cloud computing arm Amazon Web Services (AWS) reported a revenue of $3.53B for Q4 2016, up 47% YoY compared to 69% YoY growth in Q4 2015. Q4 revenues increased by more than $300M from Q3 2016. AWS accounted for 8% of Amazon's Q4 revenues and has hit a $14B annual run rate. Yet, many are concerned about the effect of price cuts on the company’s profitability as this Seeking Alpha post notes. CFO Brian Olsavsky on this front stated that "you are right that we had seven price cuts in Q4 essentially timed for December 1, so about a third of the impact was seen in Q4". So, profitability will have some short term negative effects.
However, one needs to note that in spite of increasing competition and cheaper pricing by rivals, AWS accounts for a 33.8% global market share. Microsoft, Google and IBM who are its three nearest competitors, together accounted for only 30.8% of the market share according to new data reported by Canalys. The report also states that "total spending on cloud infrastructure services, which stood at $10.3bn in the fourth quarter of last year (up 49 percent year-on-year) will hit $55.8bn in 2017 - up 46 percent on 2016's total of $38.1bn". With increased competition and commoditization of cloud infrastructure as a service, it is but natural for profits and margins to get affected. However, given the booming cloud market, AWS with its first mover advantage and its innovative offerings will continue its double-digit growth although not at its previous stratospheric levels. The negatives of the price cuts seem to be overplayed.
Amazon's Long-term Bets
Amazon over the past year had invested heavily in Prime Now, AmazonFresh, Alexa and Echo devices, Prime videos, Amazon Go store and Amazon Studios as well. And we all know how Alexa-enabled devices were the top-selling products across all categories on Amazon.com and the potential of Alexa as a voice assistant in various fields. Likewise, Amazon Studios has won two Golden Globes: Casey Affleck (Best Actor) for Manchester by the Sea and Billy Bob Thornton (Best Actor in a TV Series) for Goliath. The long-term investments of Amazon seem to be yielding results slowly. Prime, video, Echo can still be expanded in international markets like China, India. So one can expect better growth from international markets in the long run. Also, there is speculation that Mr. Bezos has hinted at large super market-style brick-and-mortar grocery locations manned by robots. There is also some belief among the analyst community that Amazon physical stores could improve the e-commerce retail giant's earnings significantly. One needs to have a certain level of faith in the company's ability to make its long-term investments work through the next few years, in order to invest in AMZN stock, taking into consideration its track record.
Summing It Up
The revenue miss and guidance below expectations will probably keep the stock price down for a while. Long-term investors should go by Amazon's double-digit revenue growth and Jeff Bezos' vision. The company's long-term investments look bright. This pullback in AMZN stock price, when the company's fundamentals are bright but it has ended up disappointing Wall Street opens an opportunity for investors to buy into AMZN stock at lower prices. Investors also need to be aware that AMZN shorts have had a hard start to 2017 notwithstanding the post-earnings selloff. This gives you the confidence that AMZN is not going down anytime soon.
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