Amazon's [AMZN] Q1 earnings results easily beat expectations. Revenues and earnings per share were up as the company's booming cloud business, AWS, drove fatter profit margins. But as profits soared, overall growth slowed with the share price relatively unchanged in after-hours trading.
We break down the Q1 results and what they could mean for the rest of 2019.
How has Amazon's share price performed recently?
Amazon is one of 2019’s best performing tech stocks with the share price up 23% since the start of the year. This is in marked contrast to the end of 2018 when the stock tumbled 27% between September and December. Weighing on the share price had been disappointing Q4 2018 results and faltering international expansion.Amazon 1-year share price performance, CMC Markets, 26 April 2019
Going into the Q1 results, Amazon had expected net sales of between $56 billion and $60 billion. That would represent a growth of 10% to 18% compared to the same quarter last year.
Analysts were expecting earnings per share of $4.72 and revenue to come in at $59.65 billion.
How Amazon performed in the Q1 results
Amazon delivered a huge earnings beat. Revenues came in at $59.7billion, up 16.9% compared to the same quarter last year. Earnings per share were $7.09, smashing analyst expectations.
|PE ratio (TTM)||95.29|
|Return on Equity (TTM)||28.27%|
Amazon stock vitals, Yahoo finance, 26 April 2019
Amazon's cloud computing subsidiary, AWS, continued to be a huge money-spinner for the company. In the latest set of results, AWS grew 41% to deliver $7.7 billion in revenues and accounted for 11% of net sales.
Profit margins widen as growth slows
Despite stellar earnings, overall revenue slowed. In North America, it grew 17% compared to 46% last year. While internationally it grew 16%, lagging far behind last year’s 34% growth.
Amazon’s advertising business also decelerated. This quarter it saw 34% revenue growth, pulling in $2.7billion. This is a big slowdown from the 97% year-on-year growth in Q4 2018. With its dominant position in the product search space, online advertising is a relatively untapped revenue stream for Amazon, and expectations are for the company to increase its efforts to capitalise on this.
But with slowing growth has come improved margins, and increased profitability. Amazon saw $3.6billion net income and $4.4billion operating profit. This represents a 7.4% profit margin, doubling the 3.6% margin seen in the same quarter last year.
Advertising business's revenue growth in Q1 2019
In after-hours trading the stock was up 1%, to trade near the $1,916 mark.
Free cash flow grows 89%
Amazon's long-term goal is, in its own words, to 'optimise free cash flows'. Yet, first-quarter results usually see negative cash flow as inventories fall back after the festive season.
Free cash flow this quarter bucked the trend to come in at £23 billion, up a mammoth 89% from the $7.27 billion seen in the same period last year.
This is an important metric when evaluating Amazon. Bezos highly rates the metric, as it directly relates to the amount of money available to put back into the business, and gives an indication of the firm’s efficiency in this respect.
This idea permeates throughout the organisation. Teams will evaluate a new idea in terms of whether it’s customer focused, and if it will improve absolute cash flow. After all, a product that is used repeatedly will generate a decent cash flow even if margins are lower.
Bezos is on record as saying:
"When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”
If you understand Bezos' thinking on this one, you understand Amazon.
“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” - Jeff Bezos, Amazon CEO
What does Q2 2019 look like for Amazon?
Amazon expects Q2 revenue to come between $59.5 billion to $63.5 billion, in line with analyst expectations. Operating income is now forecast to be between $2.6 billion and $3.6 billion, well below the $4.19 billion expected by Wall Street.
This could account for the muted reaction the stock saw in after-hours trading. The implication here is that Amazon will increase spending in Q2 and margins could shrink. Also stated during the earnings announcement was Amazon’s commitment of $800 million to make one-day delivery free, for all Prime members.
Another key growth driver will be international expansion. Amazon has a patchy record here, to say the least. In July the company will cease its marketplace business in China, where it has been dwarfed by Alibaba.
Investors will be looking for Amazon to apply the lessons it learnt in China to India, where it has spent $5 billion to secure a foothold. Already the company has experienced regulatory headaches and stiff competition from local providers.
Despite this, Seattle based-analysts Stifel have pinned a $2,300 price target on the stock. Hitting this would represent a hefty 20% upside for the share price.