- Reports Q2 2019 results on Thursday, July 25, after the close
- Revenue expectation: $62.5B
- EPS expectation: $5.56
Amazon.com (NASDAQ:AMZN) is on tap to report earnings this week, but Wall Street may not be looking at it with the right pair of eyes.
Since crossing the $1 trillion valuation and achieving an all-time high of $2,050 in late 2018, the company has been unable to break through to higher ground.
Amazon’s growth rate has slowed, which Wall Street doesn’t seem to appreciate, even though its earnings last quarter vastly exceeded expectations. And if analysts and investors continue to focus solely on the top line, ignoring how the company has evolved, they’re putting real pressure on the company when it reports.
Revenue Growth Is Unsurprisingly Slowing
The premier selling point for Amazon shares the past decade has been an almost unrivaled growth rate. In Q1 of 2018, the company boasted $51 billion in revenue, a 43% year-over-year growth rate. That was followed by another stellar quarterly report and a 39% top-line growth rate.
Just a year has passed, but those days feel long gone. Over the past two quarters, Amazon’s year-over-year revenue growth has fallen below 20%. The 17% revenue growth last quarter was the worse growth rate since the 15% in Q1 2015.
Retail sales are mostly to blame for this slowdown. Its North America retail sales growth rate dropped to 17% from 46% over the past year. The international retail sales growth rate has fallen to just 9% from 34% in the past quarter.
Amazon Web Services, the crown jewel of Amazon’s growth story, is also slowing, but at a much less alarming rate. The growth rate for Amazon’s cloud division last quarter was 41%, compared with last year’s 49%.
Profits Are Now Where the Big Numbers Are
Operating income, in stark contrast to revenue, has made meaningful strides in the past year. Last quarter, Amazon brought in $4.4 billion in operating income, compared to $1.9 billion the year before. This also almost doubled Amazon’s operating margins across the business to 7.4% from 3.8%.
North America retail sales operating income doubled $2.2 billion from $1.1 billion and the margins improved as well, to 6.4% from 3.7%. Arguably the biggest profitability shift was in Amazon’s international retail sales. Last quarter, the company’s operating loss was $90 million, a much smaller loss than the Q1 2018 figure of $622 million. Having a profitable international operation has eluded Amazon in the past, but now seems within reach.
Amazon Web Services, the company’s cloud arm, continues to be the cash cow. The segment's operating income grew to $2.2 billion from $1.4 billion, or 57%. The operating margin there continues to dazzle investors and has risen to 28.8% from 25.7% in the past quarter.
Is Wall Street Stuck in the Past?
The $1 trillion question is whether the market zeroes in on the top line or the bottom line.
We have a clue from last quarter, when Amazon hit the mark on revenue but delivered a strong beat on earnings. The company reported $7.09 EPS, 50% more than analysts’ expectations of $4.70. The next day, Amazon opened only 1.4% higher and was very volatile during trading, falling below the previous close in intraday trading.
Last quarter’s reaction to much-better-than-expected profitability is what worries me going into earnings.
Amazon is a strong business. That it’s still growing revenue at a rate of around 17% when annual revenues are $232 billion is incredible. The problem is that the absolute growth rate or profitability doesn’t matter as much as whether the company met expectations. In this case, the company beat earnings expectations by a mile but wasn’t rewarded for it.
So, Wall Street still cares about top-line growth more than profitability and while Amazon can generate more profit by making internal changes, more revenue can be a lot trickier to come by, especially at this size.
Amazon is a strong business, with a dominant retail position in the U.S, an almost-profitable international operation and a cash cow in AWS that isn’t expected to slow down as the world moves even more to cloud-based applications.
But the stock looks currently priced for more revenue growth than Amazon can deliver and short-term volatility can be expected. It's gained more than 35% this year, to close yesterday's session up 0.3% at $2,000.81.
By ignoring bottom-line growth and focusing on the top line, Wall Street is setting Amazon up for a Kobayashi Maru (a no-win scenario for non-Star Trek fans).
Be wary going into earnings.