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Amazon didn’t see ‘the demand slowdown’ from inflation, analyst says

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Oppenheimer Managing Director and Head of Internet Research Jason Helfstein joins Yahoo Finance Live to parse Amazon earnings.

Video Transcript

BRAD SMITH: Amazon notching a big quarter after reporting a beat in revenue. Despite a loss in the income category, the company gave an upbeat forecast for the first of the year, touting gains in ads and Amazon Web Services.

Joining us now to break down Amazon's latest quarter is Oppenheimer managing director, Jason Helfstein. Jason, great to have you here with us, as always. First and foremost, here within the quarter, this company is continuing to cite growth opportunities within the cloud. Of course, that a major margin contributor for the company. How do you see it?

JASON HELFSTEIN: Yeah, I mean, they're not-- now they're, like, the third cloud provider to report, right, after Microsoft and TCP, Alphabet. The question with the cloud has just been, will there be a slowdown? And you're basically saying not really. I mean, maybe a point or something, but nothing like you were seeing the slowdown with more consumer-related. In fact, if anything, the weakness in the quarter had to just do with they did increase stock-based compensation for employees is typically when they have their annual reset.

And I think they did see some wage pressure that made that be a bit more than historically. And so that maybe dented the margin a little bit for AWS. But from a top line backlog, I think they said backlog was up 65% to $100 billion. You know, and so the business is doing quite well.

BRIAN SOZZI: Jason, Amazon didn't really say on the call last night that they're seeing a lot of discounting, like other retailers. Their retail business seemed to have held up well. But this week, we got some major warnings from Walmart and Best Buy. Is it that Amazon is taking shares from those two retailers in an economic slowdown?

JASON HELFSTEIN: I mean, I think that's probably going to be the case. I think Amazon has a more affluent consumer than Walmart. I think that's not a big surprise. But so they just did not see, I guess, like, the demand slowdown that-- caused by inflation, right, where consumers are having to buy non-discretionary items, like gasoline and food at higher prices, and as a result, perhaps buying less clothing and other non-discretionary. So they're not really seeing that.

And while they are, obviously, having some wage pressure on the margin side in their business, like everybody is, they just didn't see that on the top line. And in fact, relative to the Street numbers, their global e-commerce came in with EBIT that was over a billion dollars better than expected.

And if you recall, they were one of the first companies to kind of say, hey, look, we got over our skis and maybe over expanded by extrapolating the trends that we saw during the pandemic. And we're going to pull back. And it's still early, and they're still losing money on an EBITDA basis. In e-commerce, the losses were better than expected.

JULIE HYMAN: Well, and it would seem like in terms of-- hey, Jason, it's Julie, by the way. It would seem like also what you're saying in terms of them being more resistant because of their more affluent customers also borne out by the strength they saw in the physical stores, i.e. in Whole Foods with sales up 12%. I guess the question is, with all of this is, is it that the affluent consumer is going to hold up well or that they're going to roll over later than the low income consumer? In other words, do you expect to see going forward, a little bit more weakness on that front?

JASON HELFSTEIN: I mean, look, I just think it's the unfortunate reality of the way inflation hits the economy. When you have certain items that you have no choice paying for, like gas and the food basics, it's going to crimp your spending in other places.

And if you have more money, you are less impacted by things like gas inflation and food inflation or heating costs, inflation, et cetera. So I just-- I mean, you can say in hindsight, well, hey, they have a subscription business. By definition, are you more affluent if you subscribe to Prime? But clearly, their strategy seems like it's being borne out.

BRIAN SOZZI: Jason, I caught you on the Roku call last night. And that stock is just under a lot of pressure for numerous reasons. I mean, after seeing a decline like that, what do you do?

JASON HELFSTEIN: It's a tough one. I do think that they have a unique asset. They are the leading streaming-- the leading operating system for streaming in the US. And they're making really nice headway internationally, right? I think they said that 25% of smart TVs sold in Mexico are Roku TVs, also making headway in UK and other areas of Europe.

But there's a few factors. Look, they are subscale and advertising to other big players. They do get-- a portion of their revenue has to do with helping these subscription services. We call them SVOD, things like Disney+ and Hulu, et cetera. Sign up subscribers, and they're very long-term deals. And when they're seeing lower active account growth, they have their values lower. And there's not a lot of transparency around that. It's an accounting nuance called 606. But so that's weighing on them.

And then the other thing you have to remember within, they're going after television budgets. And the bulk of television budgets are allocated in the upfront process, right, where there's contractual upfront commitment. And while you do have the ability to cancel, you usually can't cancel unless it's a special circumstance in the quarter.

And while Roku is making progress and they've said they've locked in a billion dollars of those commitments for the next kind of season, they really don't have that to fall back on, like, ABC, NBC, CBS, Fox, et cetera. So when advertising does slow, they will pull-- cut budget on Roku first. We saw this in the second quarter of 2020 with COVID. Now they're also the first to benefit when it comes back. But, you know, that's the reality.

Look, we think on a multiple of gross profit, this is now trading at a comparable level to kind of lower tier platforms or assets. And at this valuation, we just think it's not worth downgrading. And we also think there's potential strategic value. I think this company could be really valuable to other bigger companies. That being said, the CEO does have super voting stock. So it's really his decision if they sell the company.

JULIE HYMAN: Well, as one of your peers asked in a note, is Roku, broku? It sounds like your answer is no to that one. Jason Helfstein, good to catch up with you. Have a good weekend.

JASON HELFSTEIN: Thank you.

JULIE HYMAN: Oppenheimer managing director and head of internet research.