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Why Is Amazon (AMZN) Down 4.2% Since Last Earnings Report?

Zacks Equity Research
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

A month has gone by since the last earnings report for Amazon (AMZN). Shares have lost about 4.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Amazon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Amazon's Q1 Earnings & Revenues Beat Estimates

Amazon.com (AMZN) reported first-quarter 2019 earnings of $7.09 per share, beating the Zacks Consensus Estimate by $2.48. The figure soared 116.8% year over year.

Further, net sales of $59.70 billion comfortably surpassed the Zacks Consensus Estimate of $59.69 billion and came within the company’s guided range of $56-$60 billion. Further, the figure reflected year-over-year growth of 17%.

North America revenues (60% of sales) increased 16.6% from the year-ago quarter to $35.81 billion. International revenues (27% of sales) increased 9% year over year to $16.19 billion. Amazon Web Services (AWS) revenues (13% of sales) surged 41.4% year over year to $7.69 billion.

Amazon’s drive to bolster grocery retail presence on the back of its strengthening grocery services contributed to the results. Further, expanding global presence of Alexa continued to aid its adoption rate. Additionally, enhanced key offerings by AWS remained a key catalyst throughout the first quarter.

Strengthening AWS Services Portfolio

AWS revenue growth was driven by its expanding services portfolio which helped it in winning a number of customers during the reported quarter. Moreover, its growing number of regions and availability zones acted as a tailwind.

The company made its new storage class, Amazon S3 Glacier Deep Archive, generally available during the first quarter, consequently taking the total number of S3 storage class options to six. Moreover, Deep Archive started gaining traction among customers rapidly just after it was made available.

Further, AWS made a new storage class for Amazon EFS, Amazon EFS Infrequent Access, available to customers.

Additionally, AWS made, Concurrency Scaling, a new feature of its scalable data warehouse, Amazon Redshift, available to customers. The company also announced the general availability of its fully-managed service, Amazon WorkLink, during the first quarter.

Further, the company launched a separate library of open-source code for Elasticsearch, called Open Distro for Elasticsearch, thus bolstering open source initiatives.

AWS’ total number of Availability Zones currently stands at 64 across 21 global infrastructure regions. Notably, it opened AWS Asia Pacific region in Hong Kong recently and unveiled its plans to launch another 12 Availability Zones and four regions in Bahrain, Italy, Indonesia and South Africa.

All these strong endeavors bolstered AWS customer base. During the first quarter, companies like Choice Hotels, Gogo (GOGO) and Lyft selected AWS for running their entire infrastructure and workloads.

Further, Standard Bank Group, Guinness Six Nations Championship and Clippers CourtVision have chosen AWS as their preferred cloud provider, thanks to its robust cloud computing, AI, ML, Deep Learning (DL) and data analytics techniques.

In order to continue with the robust momentum among the customers, Amazon announced three new renewable energy projects in Ireland, Sweden and the United States to power AWS’ global infrastructure globally.

Additionally, AWS entered in a multi-year agreement with Volkswagen in order to help the latter in building its cloud-based Industrial digital production platform, Volkswagen Industrial Cloud.

Prime Momentum Continues

During the first quarter, the e-commerce giant sustained its Prime momentum on the back of robust grocery services, Whole Foods strategy, fast delivery services and expanding content portfolio.

The company introduced an advanced and convenient method of delivering packages for Prime members in the reported quarter. Prime members can now get their orders delivered by selecting any day of the week via Amazon Day. Notably, the initiative is gaining rapid adoption among shoppers.

Further, Amazon adopted a price cut strategy at Whole Foods Market for fresh produces to boost customer visit rate further. Moreover, two-hour delivery service from Whole Foods stores via Prime Now continued to witness strong demand from grocery shoppers.

Recently, this service was launched at nine U.S. metro places, thus taking the total count to 75 U.S. metros. Further, grocery pick-up service, which is now available at 30 U.S. metro areas, continues to gain traction.

Additionally, Key by Amazon, which was launched in the beginning of first quarter, gained popularity among the Prime members owing to its efficient delivery system. The service is now accessible to Prime users in 50 U.S. cities.

Further, the company made every effort to bolster presence in booming streaming space on the back of its robust content portfolio. Amazon brought the rights to Major League Baseball's ("MLB") OTT service, called MLB.TV on Prime Video.

Additionally, Amazon Studios green lighted more than 20 new and returning local Prime Original Series, which includes Bandish Bandits in India, The Bachelorette in Japan, LaTemplanza in Spain, Wir Kinder vomBahnh of Zoo in Germany and El Presidente in Mexico. Further, the first season of its original series, Hanna, was launched on Prime Video at the end of the reported quarter.

Alexa Becoming Smarter, Fire TV Gaining Traction

The Alexa Skills Store now offers more than 90,000 skills. Alexa users can now access Apple Music on Fire TV, Echo and Sonos devices in the United States and the U.K. Also, Amazon rolled out new tools for the enhancement of Echo Auto, Alexa enabled vehicles and automotive accessories skills.

Further, Amazon benefited significantly from the international expansion of Alexa features. The company introduced Echo Input in India, Australia, Japan, France, Spain and Italy. Skype calling with Alexa was rolled out in Mexico, Italy, Spain, France and Germany. Also, Echo Show was unveiled in France, Spain, Italy and India.

Moreover, support to regional languages in Alexa also remained positive. Alexa now supports French in Canada. Further, Amazon is gearing up to launch Alexa in Brazil later this year.

Further, the company continued to gain traction in the car infotainment space. Alexa Auto was introduced in Audi e-tron.

Additionally, the company unveiled Fire TV Stick compatible with Alexa Voice Remote. Moreover, Fire TV continued to witness growth in its adoption rate. Its active user base stands at 30 million.

Quarter Details

Product sales (57.4% of sales) increased 8.5% year over year to $34.28 billion. Service sales (42.6% of sales) surged 30.8% from the year-ago quarter to $25.42 billion.

Operating expenses were almost $55.28 billion, up 12.5% from the year-ago quarter. Cost of sales, fulfillment, marketing, technology & content, and general & administrative surged 10.4%, 10.4%, 35.7%, 17.3% and 9.9%, respectively. Meanwhile, other operating income came in at $5 million compared with $63 million of expense in the year-ago quarter.

As percentage of revenues, operating expenses declined 360 basis points (bps) on a year-over-year basis to 92.6%. Cost of sales, fulfillment, and general & administrative contracted 340 bps, 90 bps and 20 bps, respectively.

However, technology & content, and marketing expenses expanded 10 bps and 80 bps, respectively, from the year-ago quarter.

Operating income jumped 129.4% from the year-ago quarter to $4.42 billion. Operating margin expanded 360 bps from the year-ago quarter to 7.4%.

Operating income for North America and AWS came in $2.29 billion and $2.22 billion, up 99% and 58.8%, respectively. Further, operating margin from these two segments expanded 270 bps and 320 bps, respectively.

International segment reported a loss of $90 million compared with the year-ago quarter’s loss of $622 million.

Guidance

For second-quarter 2019, Amazon expects net sales between $59.5 billion and $63.5 billion. The figure is anticipated to grow in the range of 13-20% on a year-over-year basis.
Management projects an unfavorable impact of approximately 150 bps from foreign exchange rates.

Operating income is expected between $2.6 billion and $3.6 billion compared with $3 billion in second-quarter 2018.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -14.79% due to these changes.

VGM Scores

Currently, Amazon has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Amazon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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