As Amazon Faces Slowest Growth in Years, Focus on Margins

(Bloomberg) -- Amazon.com Inc. reports fourth-quarter results after the market closes Thursday, and analysts are braced for a relatively weak read on revenue growth, focusing instead on the benefits cloud-computing and advertising have had on its margins.

The e-commerce company is expected to deliver a sales increase of about 19 percent in its holiday quarter, the slowest pace since the start of 2015, according to Bloomberg data. Profit growth is also expected to decelerate, though net earnings are still seen more than doubling.

In particular focus are the company’s margins, which analysts expect to expand by 8.4 percent, an improvement that’s due in large part to the explosive growth of Amazon Web Services.

Wall Street is calculating AWS revenue of nearly $7.3 billion, based on the average of seven analyst estimates compiled by Bloomberg. That represents growth of more than 42 percent. In the third quarter, AWS accounted for 11.8 percent of Amazon’s total revenue.

Michael Graham, an analyst at Canaccord Genuity, downplayed the deceleration in overall revenue growth, saying it was due to the company “lapping the first full quarter contribution from Whole Foods” and a change in the amortization schedule of Amazon Prime subscriptions.

“Despite this dynamic, we believe underlying business trends remain strong,” he wrote in a preview note. “Longer term, we believe Amazon’s rapidly growing scale of investment is strengthening its competitive barriers, and we continue to see the company as having the most robust and durable growth outlook.”

Goldman Sachs analyst Heath Terry wrote that despite concerns over growth and the health of the consumer, “we believe share gains at Amazon (both retail and AWS) and the number of opportunities for investment present more than enough runway for consolidated growth to remain above investors’ key 20 percent benchmark.”

Amazon gave a disappointing forecast for the holiday quarter in October, although it alleviated some of these concerns when it subsequently touted a record-breaking holiday season. The stock, long one of the top-performing Internet names, is up nearly 30 percent from a December low, although it remains down about 15 percent from record levels hit in September.

Shares rose 3.9 percent ahead of the results on Thursday. The rally was enough to make it the largest stock by market capitalization, pushing past Microsoft Corp.

Beyond the numbers, this quarter could also contain a personal element as founder and CEO Jeff Bezos recently announced that he and his wife MacKenzie were divorcing, raising potential questions about whether the settlement will impact his control of the company.

Just the numbers

• 4Q GAAP EPS estimate $5.56 (range $4.37 to $7.58)
• 4Q net sales estimate $71.92 billion (range $70 billion to $73.65 billion)
• 4Q gross margin estimate 39.39 percent
• 4Q operating income estimate $3.65 billion (range $3.26 billion to $4.09 billion)
• 1Q GAAP EPS estimate $4.43
• 1Q net sales estimate $60.99 billion
• 1Q operating income estimate $2.99 billion

Data

• 48 buys, 2 holds, 1 sell
• Average price target $2,147 (29 percent upside from Wednesday close)
• Implied 1-day share move following earnings: 7.2 percent
• Shares rose after 7 of prior 12 earnings announcements
• GAAP EPS beat estimates in 9 of past 12 quarters

Timing

• Earnings release expected 4:01 p.m. on Jan. 31
• Conference call scheduled to begin at 5:30 p.m.

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Chris Nagi

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