Amazon Earnings: Will the Growth Story Continue?

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The powerful Amazon (NASDAQ: AMZN) is in pole position to capitalize on a number of secular trends in the long run. Ranging from core retail to tablets to its third-party (3P) business, all are poised to gain incremental share from most of the categories. And Amazon will receive substantial tailwinds from consumer shifts towards media consumption online, and more customer acceptance in shopping online, especially in international markets.

Strong growth numbers

In the last quarter Amazon's revenues grew a healthy 22% Y/Y to $16.07 billion. The company's operating income stood at $181 million and its net income stood at $82 million. Amazon's customer accounts have increased to more than 209 million customer accounts. On a comparative basis, eBay (NASDAQ: EBAY) has roughly 120 million active customers on its marketplaces business, so Amazon has the ability to drive its gross merchandise volume (GMV) to much higher levels compared to eBay.

Amazon is growing faster than the e-commerce space as well. According to comScore, non-travel e-commerce grew 16% in May '13. Amazon's same-store-sales (SSS) growth in June 2013 stood at 30.6%, and eBay's SSS stood at 17.7%. 

In addition, Amazon's paid unit growth is growing at a healthy clip of 30%, and third party sales made up 40% of total paid unit sales. As Amazon is starting to sell more digital units compared to physical units, the company’s growth in digital unit sales is increasing at a faster pace. And as Amazon is selling more Kindles and other hardware, the company's future sales of digital content, including e-books, music, movies etc, should grow its Media sales across the globe.

International markets are a big opportunity

In the last quarter, Amazon's revenue growth in North America stood at 26% Y/Y, and the International growth stood 16%. However, Amazon faced a lot of macroeconomic and currency headwinds, which impacted its revenue growth. Amazon’s FX exposure, primarily to the pound, euro, and yen, swung the company's fortunes downward.

Amazon’s net shipping costs, which is a number investors look for keenly, stood at $763 million or 4.7% of total worldwide sales. Amazon is still making big investments in a handful of the 10 countries it operates to grow its businesses. And Amazon's CFO stated in the last earnings call that the company's growth in unit sales in International is much higher than the revenue growth of 16%. Amazon will almost certainly expand its reach in newer markets, increase selection and develop a massive online platform. And Amazon can easily grow its top-line revenues at a double digit rate sustainably for years, as the company can earn more revenues from its higher margin businesses. 

Higher margin segments

The recent and increased optimism among investors surrounding Amazon has been related to the company's solid margin expansion. Amazon has seen its gross margin in 1Q13 expand to 26.6% compared to 24% in 1Q12. Non-retail businesses, including Amazon Web Services, advertising, Prime and its third-party business, have much higher margins compared to its core retail business. 

In particular, its Third Party/Fulfillment by Amazon (FBA) business is gaining momentum and growing at double digit rates. In 1Q13, Amazon's service sales were $2.8 billion, and its Other Revenues item, including AWS, advertising and credit cards, stood at roughly $800 million. As a result, Amazon's revenues from the third party segment are approximately $2 billion, which is a sizable increase from $1.4 billion in 1Q12. And this business should gain more momentum as more merchants get into Amazon's platform. 

In addition, Amazon has been making big investments in its media and entertainment business to drive up its subscription revenues from Amazon Prime. Amazon has been trying to compete with the Internet streaming giant Netflix (NASDAQ: NFLX) and gain more subscribers to watch TV and movie content on Kindles and other devices. Amazon has roughly 8-10 million subscribers for Prime in the U.S. hasn't gained much traction in adding users, and is substantially behind Netflix which has 29.8 million users in the U.S. alone.

Amazon’s large investments to add more video content including originals should reduce the churn for Amazon's subscriptions revenue. The company gets a lot of tailwind from Prime subscribers who engage in a lot of cross-shopping on Amazon.com and drive merchandise volume. Also, Amazon's Web services is getting more users and cutting down prices to gain market share and monetize Amazon's back-end infrastructure.

Q2 Guidance and Consensus

Management's guidance range for revenues came in at $14.5-$16.2 billion, which points to a Y/Y growth rate of 13%-26%. The company’s operating income guidance was rather weak, as the company is expecting a loss of $340 million to a marginal profit of $10 million. However, the sell-side is pretty optimistic about Amazon and projecting revenue estimates of $15.74 billion and a consensus EPS of $0.06. Amazon is trading at rich multiples and coupled with the company's customary wide guidance range, the stock can react to an earnings miss or surprise.

The Takeaway

Amazon continues to invest heavily in its numerous operating segments to gain market share. The company is adding more fulfillment centers, upgrading its service in the cloud, expanding into newer segments, selling more tablets etc. The company has a large number of growth drivers, and some of these newer revenue streams have much a higher profit margin, which enhances the valuation case for Amazon in the future as well. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, and Netflix. The Motley Fool owns shares of Amazon.com, eBay, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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