We now have Amazon in the spotlight with a dramatic post-market dump. Quick overview, it does seem apparent that this sell-off is warranted as we are looking at how EPS missed expectations by -189.02%. That is indeed a huge miss for a large-cap tech stock and the after-hours selling pressure would most certainly have caught many investors off guard.
In this article, apart from the numbers, I will be exploring 3 key factors that appear to be adding to the uncertainty of Amazon’s recent earnings.
Amazon’s (AMZN) 1Q2022 Financial Highlights
1. Revenue
Revenue – $116.44 billion vs. $116.3 billion expected, according to Refinitiv.
Revenue was satisfactory at best coming in as per analyst expectations. If we broke this down a little into Amazon’s 4 Key verticals and compare them with 1Q21, the comparison are as follows,
At face value, we are looking at revenue numbers that by and large are acceptable by investors. The problem here lies in this quarters revenue relative to that of the past 20 years. We’ll explore this in greater detail later on.
2. EPS
Q1 GAAP EPS : -$7.56 vs $8.36. Misses by $15.78.
Unfortunately, I would conclude this metric to be the deal breaker for Amazon. So what exactly happened here and what does this mean for Amazon? Simply put a negative EPS means that a company is “losing money, or spending more than it is earning.”
Amazon cited the usual challenges as reasons for this loss which include overall macroeconomic conditions, Ukraine etc. but it is apparent that there is more here that’s going on in the sense that either analyst are too optimistic about the company’s performance or Amazon is literally in the ***. Will expand more on this point in the next section.
3. Operating Income
Net Income – $3.7 billion vs. $4 billion in expected
Though net income seems to have fallen about 10% short of expectations, this seems to be overlooked given how far off their EPS was. In comparison with their 1Q2021 performance, net income was more than halved. Once again this also seems to be overlooked.
What exactly is the problem here?
There appears to be multiple problems that the company is facing. Too many to discuss in one article, hence I’ve listed the 3 biggest problems which I think investors should be aware of.
1. Impairment from Rivian
In a nutshell, Amazon invested in Rivian back in 2019 as part of their plan to go green (Aprox. 18% stake). At the peak of Rivian’s IPO late last year, Rivian actually ” added $11.8 billion to Amazon’s bottom line in the fourth quarter, but the stock dropped more than 50% in the first quarter and wiped away $7.6 billion from first-quarter profit.”
Hence, like most of us now, Amazon is also holding on to a bag.
It is difficult to conclude at this point if Amazon’s exposure to EV via Rivian would pay off but one thing is for certain that as with all EV startups, the road ahead is long and they will most like feel the impact of inflation & rate hikes more than other companies.
2. Slowest q-o-q growth since 2001. First negative EPS since 2015.
If you think their EPS was bad, here is what it looks like on a 10-year horizon.
This is not good at all and investors will often wonder if this is the end for the company or if this is the tipping point where they lose their hold over the idea of “pandemic boosted e-commerce spending”. What’s important to note is that every market moves in cycles and that the slowdown in e-commerce growth is global and not specific to a location or country.
Amazon is not the only online retailer feeling the change. The share of retail purchases made online has dropped from 15.7% in the second quarter of 2020 to 12.9% during the last three months of 2021, according to Census Bureau data. But as Mastercard’s survey shows, online retailers gained hugely over the pandemic. E-commerce grew over 83% from March 2019 to March 2022 compared to a 9.4% growth rate for in-store shopping.
The Guardian
3. Logistics Challenges – Ongoing Pandemic, Ukraine, Rising Costs
“The pandemic and subsequent war in Ukraine have brought unusual growth and challenges,” Amazon CEO Andy Jassy said in a statement. He added that the company is “squarely focused” on offsetting costs in its fulfillment network now that staffing and warehousing capacity are at normal levels.
Cnbc
The usual narrative that was already in play is that Amazon faces the same challenges that all other companies face therefore I won’t expand too much on that.
However, if we look some possible logistics specific challenges that may have baffled analysts, we may refer to the following,
Before the earnings report, Wall Street analysts had been almost unanimous in their optimism about Amazon’s prospects, citing the massive investments in package handling and delivery facilities and continued growth in the highly profitable cloud-computing and advertising businesses.
Bloomberg
With this, I’d conclude that analysts expected the changes to cushion the impact of rising costs on Amazon’s operations but it is apparent that perhaps such changes came either too late or their material impact have yet to be seen.
But Chief Financial Officer Brian Olsavsky said the company’s rapid expansion left it with too much warehouse capacity and too many workers, which will take a while to work through.
Bloomberg
One Opportunity – AWS
This does seem familiar doesn’t it? A company where e-commerce sales are slowly and to help prop up revenue, they turn to cloud services? Yes, you’re absolutely right, Amazon’s scenario does have some similarity to that of Alibaba!
If there is one glimmer of hope throughout the whole earnings report, it would be how Amazon Web Services recorded a significant increase in revenue.
Revenue of $18.3 billion from AWS, the company’s high-margin cloud computing business, marked a 37% year-over-year (YOY) increase and beat analyst predictions. Amazon said that AWS growth was driven by new commitments from customers across industries such as telecommunications, aerospace, sports, technology, and healthcare. AWS was the only one of Amazon’s segments to report net operating income for the quarter.
Investopedia
What now?
Pperating loss is expected to continue on to the next quarter with guidance being set at a loss of $1 billion. I wouldn’t count on Rivian to help as well given the macroeconomic outlook.
In my opinion, it is evident that e-commerce sales is slowing and for investors who are still looking for value, they would most likely find it in AWS. There could be more happening in this upcoming quarter which may help fuel a rally such as their upcoming 20:1 stock split which they announced in March.
As for this current sell off, I do think that is is justified. For new investors looking to make an entry, I’d recommend taking caution as it is likely that lower support levels may be tested in the weeks to come.
