Amazon (AMZN) is trading modestly higher after blowing out earnings estimates for the seventh straight quarter.
Operating income grew a whopping 129% to $4.4 bln vs. its $2.3-3.3 bln forecast. Operating margins expanded 360 bps yr/yr to 7.4%, 220 bps above estimates.
On the other hand, revenue growth of 17% was the company's slowest in four years. Sales growth slowed in every segment other than Subscription services, where its flagship Prime offering continues to bode well for the big picture long-term.
Amazon Web Services (AWS) growth slowed a bit sequentially but came in strong at 42%, excluding currency impacts, which is quite astonishing given the $30 bln run rate. The leading cloud-computing business continues to generate the bulk of Amazon's profits. AWS operating income grew 59% to $2.2 bln with operating margins expanding 320 bps yr/yr to 28.9%.
The other high-margin business generating profits is the advertising segment. Advertising sales growth slowed to 36% (to $2.7 bln) in the first quarter, displaying normal seasonality. Advertising revenue grew in the triple-digits throughout 2018, but the business remains healthy overall despite the slowing growth. It turns out that an accounting change at the beginning of 2018 inflated growth numbers last year.
Aside from slowing growth, the only real blemish in the quarter came from the International segment, where regulatory changes in India present a headwind.
Growth in the higher margin Third-party seller services segment (+23%) continues to outpace that of Online stores (+12%), but both continue to slow as comparisons remain difficult after years of strong growth.
Amazon forecasted +13-20% revenue growth for the second quarter, which was below the +18% consensus at the midpoint for the fourth straight quarter. Management noted that quarter-to-date order trends have been strong.
Amazon guided second quarter operating income to $2.6-3.6 bln, which is below consensus of $4.2 bln, but still represents % growth at the midpoint. It is worth noting that this guidance is awfully conservative considering that Amazon has reported operating income well above guidance in seven consecutive quarters.
On the call, management dropped something of a bombshell, announcing that free two-day shipping for prime members will evolve to free one-day shipping this year. Amazon is upping the ante for its dominant eCommerce business, which is sort of a shot across the bow of traditional retailers that have finally made progress with online initiatives. Amazon already commands a near 50% eCommerce market share in the US. Shares of Target (TGT) -6% and Wal-Mart (WMT) -2% are under pressure as a result.
Amazon said that this effort will add $800 mln in incremental costs to the second quarter and wouldn't comment on the cost impact after that, but the rollout will take some time. Management also warned that expenses will increase in other facets of the business as the company continues to invest in long-term growth.
Amazon is now generating healthy profits, which gives the company even more room to invest and extend its lead in a variety of businesses.
Amazon is expected to grow operating profit 40% to $17.8 bln (margin +120 bps to 6.5%) with revenue up 18% to $275 bln this year.
The stock trades at 3.4x sales, 70x EPS, 22x EV/EBITDA, and 21x FCF estimates.
While continued investments may make the stock look more expensive, investors' faith in Jeff Bezos' long-term vision has paid in spades over the years.