Earnings season is underway. And tomorrow has a big one: Amazon (NASDAQ:AMZN). For many investors, the focus continues to be on the FANGs and technology stocks. It’s no secret that tech continues to drive the market higher. So we’ll be keen to see if the sector can keep its leadership position going, especially considering how high the FANGs — including Amazon stock — have risen over the last few years.
Unfortunately for AMZN, the results could be a mixed bag.
Amazon has a ton of levers to pull and is spending some hefty cash of building out its empire. But not all pieces of its domain are firing on all cylinders. In fact, investors received some bad news last quarter, when AMZN’s core retail sales showed some signs of slippage. Growth rates at the until fell well under expectations and management issued poor guidance figures.
Amazon stock fell about 5% as a result.
Heading into this quarter, the name of the game for Amazon will be those retail sales. The question is whether or not, investors need to start worrying.
Amazon Is A Tale of Two Parts
Over the years, Amazon has morphed from being just a retailer of goods to something more. Today, it’s a mix of businesses. And some of those businesses are surging in revenue and profit production.
For example, the company’s cloud-computing operations, Amazon Web Services (AWS), continues to dominate and pull in more customers and sales. AMZN has continued to tap this segment to provide a hefty source of cash flows to grow its other operations. Today, AWS provides about 10% of Amazon’s total sales and grew at a whopping 45% last year. Likewise, its ad revenue streams are heating up and the firm continues to dominate streaming video/music.
As good these other divisions are, Amazon recently received some not-so-good news on its retail operations. This comes from a deceleration in its growth. AMZN continues to make hay on its website, new pop-locations and in its Whole Foods locations. The problem is, those sales appear to be slowing a bit.
On the surface, Amazon’s total numbers were great — revenue across all business segments totaled $232.89 billion in 2018. That was a whopping 30.9% jump over 2017’s numbers. For the last quarter of 2018, total sales jumped to 20% to $72.4 Billion.
However, digging into the numbers it’s a slightly different picture. Product sales — which kick-out revenues from service sales, AWS and commissions paid by Amazon marketplace sellers — only grew by 8.2% when compared to the fourth quarter of 2017. Moreover, physical location sales — which include Whole Foods, Amazon Bookstores, Amazon Go and others — sank by 2.75% when looking at the same period a year ago. The win for AMZN over the last quarter was its continued surge in AWS sales and other service businesses, not so much actual selling of products.
The Key Will Be Growth Rate
By no means is Amazon struggling. But that slowing growth rate is a bit of a cause for concern. Investors have gotten used to seeing Amazon stock knock it out of the park with its reports. And with management added some cautious guidance for this quarter, traders are certainly on edge when it comes to the FANG superstar.
And they may be right to be nervous.
New reports have begun to swirl that AMZN may be hitting a sort-of saturation point of the number of Prime Members. According to data provider CIRP, the growth in Prime memberships only clocked in at around 8% last fall. That’s a big deceleration year-over-year. Additionally, the number of conversions of 30-day free trials to full memberships has sunk as well.
Considering that overall consumer confidence may be slipping and recession may be around the corner, the drop in goods sales at Amazon can’t be taken lightly. This is especially true as Amazon stock is currently going for a P/E of 97 and has surged 32% over the last year. Shares currently trade close to many analyst price targets.
We know that AWS will be a hit and its services segment will knock it out of the park. But more focus will be drawn towards its physical product sales growth than any other number in Amazon’s report. Too low and we could see a big dip in shares.
Not Selling My Amazon Stock
So, what’s the play? It depends on your timeline. If the sales growth figures aren’t as impressive as Wall Street would like, longer-term investors may get a huge buying opportunity in Amazon stock if they dip. The firm is still a revenue machine — even with declining goods sales. And increasingly, the focus has been on the profitability of its operations. Amazon is big enough to pressure suppliers and AWS/services/advertising margins are super huge. All of this is a big win longer term.
If the product sales are down, I’ll be looking to see what management says about boosting those figures. Particularly, how it plans to get more juice out of its Prime members and physical locations. Given the surge in its services segment, it has some flexibility before we need to really worry about core retail sales. We should be cautious, but short-term panic could be a great buying opportunity.
In the end, traders will be looking at product sales and that could create some volatility in shares. Longer-term investors may not need to worry just yet.
Disclosure: At the time of writing, Aaron Levitt was long Amazon stock.
