Amazon shares are showing a 13% pre-market gain in the wake of their fourth-quarter earnings release, which beat analysts’ forecasts and featured the announcement of a 17% price hike for Amazon prime users in the USA. That is reassuring investors after the disappointments from, and share price beatings handed out to, Netflix and Facebook’s parents Meta Platforms
AJ Bell Investment Director Russ Mould. “But management had set a low bar for expectations with a conservative outlook alongside the third-quarter results, the quality of Amazon’s fourth-quarter figures is weak and the guidance for the first quarter of 2022 does not inspire either.
“That’s not really good enough for a cult stock with a market capitalisation of $1.4 trillion that represents more than 50 times forecast profits for 2022 and were it not for the financial gains on Rivian Automotive’s stock market flotation and the Prime price hike then Amazon’s shares could have been taken out to the woodshed, along with those of Netflix, Meta Platforms, Spotify, Peloton and other highly-valued firms that have found it hard to maintain stellar momentum as lockdowns have eased.
“Six things jump out of the Amazon Q4 report which raise as many questions as they provide answers.
- Sales growth slowed to 9.4% year-on-year in Q4 and the mid-point of management’s guidance for Q1 revenues coming in between $112 billion and $117 billion implies a 5.5% year-on-year advance. That is a massive deceleration from the rates to which investors have been accustomed and both the Q4 result and Q1 guidance represent a miss relative to analysts’ expectations
- Online stores sales fell year-on-year in the fourth quarter, with a decline of 0.6%. This is the main reason for the overall sales slowdown. Maybe shoppers are looking to get out and about a bit more, maybe they are using other websites and stores to ensure local favourites are not crushed by a multi-national behemoth or maybe the law of large numbers is taking over, but a $1.4 trillion market cap is implicitly demanding a lot more than that from what is still the Amazon’s biggest revenue stream on a divisional basis.
- Operating profit halved in the fourth quarter of 2021 as the rate of sales growth slowed and cost pressures told, in the form of wages, fuel, shipping and supply chain disruption. That was the second straight year-on-year drop in operating profit and Amazon’s operating return on sales retreated to 2.5%, its lowest level since Q3 2017.
- North America went into loss in the fourth quarter and International was in the red for the whole year. North America had not made a quarterly loss since Amazon first published operating profit by division back in 2015. International made a maiden annual profit in 2020 but slipped back into loss in 2021. Again, this shows the cost pressures which face the online delivery businesses and flags the importance to Amazon of its cloud computing operation AWS, which generated three-quarters of group operating profit in 2021 overall and all of it and more in the final three months of the year. That high-quality business is the core of Amazon and in many ways the foundations upon which it rests.
- The fourth quarter numbers were flattered – and rescued – by an $11.8 billion pre-tax financial gain on the company’s shareholding in Rivian Automotive. Rivian floated at $78 a share in November and the shares roared above $170 but they have since sagged to $60. The capital gain puts a nice gloss on the numbers and helps Amazon exceed consensus forecasts – after it had lowered expectations with a conservative outlook statement alongside the third-quarter results in October.
- Profits guidance for the first quarter implies a further big drop and even though it is flattered by an accounting change. Management steered first quarter operating profit forecasts to between $3 billion and $6 billion. The $4.5 billion mid-point of that range compares to $8.9 billion and implies a third straight year-on-year drop. Moreover, that forecast assumes a $1 billion drop in depreciation expense as Amazon now believes its servers and networking equipment will last longer than previously assumed. Even on a sales base north of $100 billion a quarter a $1 billion drop in depreciation charges equates to around one percentage of operating margin, a significant number when management forecasts imply around a 4% operating margin for Q1 2022. Such accounting sleight of hand is not an ideal way of ensuring profit forecasts are met and the lofty valuation really requires a higher-quality source of earnings than that, if it is to be sustained.
“Amazon suffered three straight year-on-year drops in operating profit in Q1 2017 and came roaring back and the power of the AWS business or the potential of the Prime price hikes to support profits should not be underestimated. In many ways that has been the bull case for Amazon – it will win customers and take share, demolish the opposition and then jack up prices when it has a dominant market position, turning itself into a wildly profitable cash machine.
“This helps to explain why the shares are rallying sharply, although some of that may also be relief that Amazon did not join Meta Platforms and Netflix in serving up a total stink bomb – even the quality of the fourth-quarter earnings numbers suggests it came pretty close.
“Perceived good news from Amazon could hardly come at a better time for beleaguered tech investors either, many of whose core holdings have taken a drubbing of late, or the wider US equity market.
“The sextet of Meta Platforms, Amazon, Apple, Netflix, Alphabet and Microsoft (MAANAM, or FAANGM as they began life) has done so much to lift headline US stock indices, thanks to their meteoric share price rises.
“But Netflix and Meta Platforms have now both disappointed. That raises the stakes at the other four given how many investors are relying on them to keep delivering.
“Before Meta’s accident on Wednesday, the MAANAM sextet had a combined market capitalisation of $9.8 trillion, or 25% of the entire S&P 500 benchmark index.
“And over the past 12 months, the MAANAM’s combined value had risen by $1.6 trillion, one quarter of the S&P 500’s $6.6 valuation gain.