Amazon’s (NASDAQ:AMZN) fourth-quarter results, announced on Jan. 30, largely eliminated multiple concerns about the company that I had previously had. Moreover, the company revealed a new, positive catalyst for Amazon stock: grocery orders.
Finally, after the Trump administration failed to take meaningful action against AMZN until now (other than depriving it of the $10 billion Pentagon cloud contract ), I’m upbeat on Amazon’s outlook through America’s Election Day.
Going into Amazon’s Q4 results, I had multiple concerns about the company that had made me bearish on Amazon stock. First of all, I worried that the severing of the company’s ties with FedEx (NYSE:FDX) would result in later-than-expected deliveries, hurting Amazon’s holiday-season results.
Amazon’s Q4 Results
I was also concerned that Amazon’s eCommerce growth would slow due to improvements made by its large brick-and-mortar competitors, especially Target (NYSE:TGT) and Walmart (NYSE:WMT).
Another concern I had was that Amazon’s efforts to deliver more items in one day instead of two days would be very costly without delivering meaningful benefits. I believed that most of the people who could wait one day for an item to be delivered wouldn’t mind waiting two days.
But of course, the Q4 results of Amazon’s eCommerce business significantly exceeded analysts’ average expectations, showing that my concerns were groundless. Specifically, its online stores’ revenue was slightly above the average outlook, while its third-party seller services unit smashed expectations, coming in at $17.4 billion, versus the mean outlook of $16.58 billion.
Further, its North America operating income came in at $1.9 billion, versus the average estimate of $1.5 billion. Finally, more people became Prime members than in any previous quarter, and Amazon’s overall net sales jumped 20% YoY. Clearly, the company’s North American eCommerce business performed quite well, and my concerns were, for the most part, unjustified.
Similarly, I was worried that the company’s cloud business was losing ground to its competitors, especially Microsoft (NASDAQ:MSFT). But the cloud unit’s revenue jumped 33% YoY in Q4, and its operating income climbed about 20%.
Still, the company’s overall spending is surging, and its operating income barely increased YoY. Its operating expenses jumped 22% YoY, and its operating income rose just 2.4% YoY.
Grocery Is an Important Growth Area for Amazon
In October, Amazon ended the $14.99 per month fee that it had been charging Prime members for two-hour deliveries of groceries. Now all Prime members can get that service for free. On the company’s Q4 earnings conference call, CFO Brian Olsavsky said that its grocery delivery orders had “more than doubled” YoY in Q4.
That news made two research firms more upbeat on Amazon stock’s outlook. After speaking with the company, KeyBanc said that the grocery business is an important part of Amazon’s strategy. The firm raised its price target on the shares to $2,400 from $2,200. Wedbush said that it had probably underestimated the company’s opportunity in grocery. KeyBanc kept an Overweight rating on the shares, while Wedbush maintained an Outperform rating.
AMZN Is Probably Safe From Trump Until the Election
In the past, I’ve worried that the Trump administration would take action against Amazon, due to the animosity between President Donald Trump and Amazon CEO Jeff Bezos. But I doubt whether there will be any important developments on that front heading into the election since I don’t think Trump will want to risk alienate Amazon’s customers before the ballots are cast.
The Bottom Line on Amazon Stock
Investors will probably remain bullish on Amazon’s growth, enabling its shares to outperform the market in the coming months. My concerns about the fundamentals of its cloud and eCommerce businesses were largely unjustified, although its anemic profit growth is less than ideal.
Still, I would recommend buying the shares until the election. If Trump is reelected, however, all bets are off, as he may very well impose new costs and probes on the company in his second term.
As of this writing, the author did not own shares of any of the aforementioned companies.
