Amazon,
Q1 2019 - Results
April, 29 2019
1. PREVIOUS ANALYSES
As always, I’ll start by reading my previous analysis on Amazon.
2. RESULTS
The company presented its Q1 results on the 25th of April.
3. POSITIVES
3.1. Revenue is up
As expected, the revenue went up by 17%, or 19% on constant currency basis. Total net sales have reached $59,7B on the first quarter compared to $51B a year ago.
Now, breaking this up, we can see that every segment has grown its revenue:
The operating leverage of each of the different segments is evident. A few percentage points difference in the revenue leads to massive growth on the operating income…
3.2. Operating margin is up
…and as a reflection of that, the total operating income has grown to $4,4B which means that Amazon’s operating margin as a whole was 7,3%. I’m not sure if the operating margin had ever been so high, I don’t think so.
Just to give some color to this, The North American segment was the surprise here:
North America operating margin has grown from 3.7% to 6,3%.
International operating margin has grown from -4% to -0.5%.
AWS operating margin has grown from 26% to 29%.
3.3. FCF is up
The first thing that you see when you scroll through the company’s presentation is the FCF figures. I like it that Amazon sees this as its most important figure.
Usually companies try to mask some of the less desirable aspects of their business but Amazon is pretty straightforward when it comes to presenting their Free-Cash-Flow figures. They even present it discounting all their financial obligations (something not usual when calculating FCF). I’ve decided to show the “regular” FCF here.
As we can see, FCF is higher, by a lot.
Let me just say that the following figure shows the TTM FCF which means Trailing Twelve Months FCF, not the quarterly FCF.
If we look at the quarterly FCF figures this is what we get. There is a huge seasonality to the cash flows and that is why the company chooses to show the TTM figures.
3.4. Prime customers to get free one-day shipping
On the earnings call, the CFO said that they are now working towards reducing the regular two-day shipping program to a one-day shipping program for the Prime members.
This will require some extra investment but I consider it to be on of the great news this quarter. Amazon is still a customer centric company and whenever and wherever they can improve their customer’s experience, they will do it.
3.5. Amazon is disrupting yet another industry
Did I tell you that Amazon is getting into the freight brokerage industry. With no need to make a profit on this new venture – at least for now – Amazon is undercutting its competitors by around 30%. This way, the company is taking advantage of its enormous scale by securing trucking capacity for the years to come.
4. NEGATIVES
4.1. Amazon is getting out of China
As was the case for other big western companies, Amazon is getting out of China. Not completely, but it won’t be selling chinese products to chinese consumers anymore nor will its marketplace continue working. It will still be selling foreign products to chinese consumers as well as its cloud services.
“We are notifying sellers we will no longer operate a marketplace on Amazon.cn, and we will no longer be providing seller services on Amazon.cn effective July 18” – Amazon
4.2. Slower growth
Although I’m not an investor who gives great importance to quarterly results, Amazon isn’t growing at 30% anymore. This first quarter it grew by 17%. This is now a huge company and logically it can’t grow forever at 30% or more.
When I wrote my first analysis, I’ve put a lot of hopes on the “new” advertising business as Amazon’s next big source of growth. Unfortunately we’re still not witnessing that happening.
Although the descending line on the next chart might lead us to think that this will keep going down forever, I still think there is huge potential here. Maybe not today, maybe not tomorrow, but I have no doubt Amazon will be a major player on the advertising business.
5. OVERVIEW & CONCLUSION
5.1. OVERVIEW
From my previous write-up, the story hasn’t changed much. Amazon is still one of the greatest companies to date and no one can know for sure where it will be 10 years from now. One thing I we can be sure of is that it will be menacing many other industries on its way.
It seems that there is no business line this company can’t get into and Jeff Bezos is undoubtedly one of the amazing business visionaries of our times.
On my first analysis I’ve laid out what I think was a conservative estimate for the future performance of the different segments, all of which were surpassed this quarter.
To make a long story short, when updating my calculations with this quarter’s figures, and not changing my conservative growth assumptions, I get a market cap for 2023 of $1,2 trillion, representing a 4,3% CAGR from today’s market cap.
Of course Amazon can outperform all of my assumptions but the point of this exercise is to be conservative. If even in a conservative scenario, one has little downside risk and lots of upside, those are the companies you should buy.
I would love to have owned Amazon since inception but with such a demanding valuation I still don’t think there is a high margin for error (or safety) on this one.
5.2. CONCLUSION
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