Amazon.com (ticker: AMZN) reported fourth-quarter earnings after the bell on Thursday, sending AMZN stock plunging. Amazon missed fairly badly on revenue but easily beat on earnings, while guidance was also a bit disappointing.
Despite the earnings beat, the combination of a top-line miss and weak guidance was too much for investors, and Amazon shares immediately lost 4 percent in after-hours trading.
Before Amazon’s earnings release, shares came within 0.6 percent of their all-time high of $847.21 on Thursday; shares had been on a remarkable, 1-year, 50 percent tear going into the release.
[See: 7 Best Tech Stocks to Buy for 2017.]
That rip-roaring rally will likely take a pause after the day’s results.
The numbers behind the AMZN stock move. Fourth-quarter revenue rose 22 percent to $43.74 billion, a record quarter for AMZN, although that figure missed expectations for a 25 percent jump to $44.68 billion. Earnings per share rose 54 percent to $1.54, beating the $1.35 consensus estimate by a mile, while guidance for the first quarter was much lower than expected.
Amazon said it expected first-quarter revenue to come in between $33.25 billion and $35.75 billion, the midpoint of which is $34.5 billion. Wall Street had been guiding for first-quarter sales of $35.95 billion. Often, companies give somewhat conservative guidance to give themselves some wiggle room, so a slightly lower midpoint than what Wall Street was hoping for isn’t usually a huge deal, but being almost $1.5 billion short is clearly more leeway than people expected.
Fourth-quarter operating income came in at $1.3 billion, above Amazon’s previously given (and rather wide) range of somewhere between $0 and $1.25 billion.
Growth drivers. While the fourth quarter is typically the best time of year for most businesses, retailers are famously dependent on the final three months of the year for their sales, and Amazon is no different.
One of the main reasons AMZN stock has risen so quickly in the past year has been Amazon Web Services, Amazon’s cloud computing arm. What started as an internal way to manage, store and analyze its own traffic, infrastructure and data was turned into a business-to-business service that Amazon offers up to enterprise clients.
AWS sales rose to $3.54 billion in the fourth quarter, a 47 percent increase from the previous year and far faster than sales in either North America (22 percent) or international (18 percent), Amazon’s other two reporting segments.
But while AWS is growing quickly, it still accounts for only 8 percent of overall company sales. So why is it so meaningful for AMZN stock? One word: profitability.
[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]
In the fourth quarter, AWS took in $926 million in operating income, while Amazon as a whole took in $1.26 billion. Due to operating losses in its international markets, AWS accounted for 74 percent of the company’s overall operating income despite accounting for just 8 percent of sales.
The AWS operating margin was 26.2 percent last quarter, compared to 3.1 percent in North America and -3.5 percent in international.
Shifting away from AWS, Amazon also sold a record number of its own devices, driven by the wild success of Alexa devices and the Amazon Echo family especially. Alexa, Amazon’s AI-powered virtual assistant, has been programmed into Amazon’s Echo speakers and newer Fire TV Sticks.
Echo device sales soared more than 800 percent in the quarter, and the Echo Dot, a $49.99 voice-controlled, Alexa-enable mini-speaker and smart home controller was the best-selling item on Amazon.com since its release.
Ya gotta spend money to make money, right? One drag on growth in the quarter was fulfillment costs, which rose 26 percent to $5.7 billion in the quarter. Technology and content spending also soared, jumping 27 percent to $4.5 billion. These are high-cost areas that AMZN stock investors would definitely like to see controlled.
“Amazon shareholders have been waiting patiently for a decade to see Amazon turn its awesome e-commerce revenue growth into real profits,” says K C Ma, professor of finance at Stetson University. “Cash flow is desperately needed to fund the capital expenditure in new warehouses, international operations and digital content in order to sustain further growth in market share.”
Amazon has certainly been hiring aggressively in its quest to spark growth. The company’s headcount has risen 30 percent in the last two years, going from 88,784 in February 2015 to 115,464 now, LinkedIn numbers show. It announced in October that it expected to create 120,000 seasonal jobs related to customer fulfillment and service during the holidays.
As for its peers, logging new highs seems to be in vogue right now for the biggest large-cap tech stocks. Apple ( AAPL) reached 52-week highs this week after crushing on earnings; Facebook ( FB) hit all-time highs after a blowout quarter, and Alphabet ( GOOG, GOOGL) reached its own all-time highs last week. Netflix ( NFLX) also set all-time highs after another great report in January lifted spirits.
[See: 7 of the Best Stocks to Buy for 2017.]
In other words, all the so-called “FANG” stocks are crushing it. Or at least they were until Amazon earnings. Despite record numbers, the tepid response from investors may show that the market feels AMZN stock is fully valued here.
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Amazon.com Earnings: Record Revenue Can’t Lift AMZN Stock, Shares Plunge originally appeared on usnews.com
