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Amazon Earnings: Revenue Growth Starting to Slow?

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Amazon stock (AMZN) continues to trade at a premium to other established retailers. And investors have been willing to pay a high multiple for Amazon because AMZN has been growing sales at an annualized rate of 19% per year since 2010.

In the last few years, Walmart (WMT) has stepped up to challenge Amazon’s dominance in the online retail sector. Walmart boasts a mature-company growth rate of 2.7 annualized since 2010. And the relative models show why Amazon stock trades at premium to Walmart. Walmart stock trades at a price-to-earnings multiple of 27 versus Amazon’s 72. Also, Walmart’s price-to-sales multiple is at 0.65 versus Amazon’s 3.45.

Investors are paying for considerable expected future growth in Amazon. In this article, I’ll explore Amazon’s growth rates to see whether they support AMZN’s current valuations ahead of Q3 earnings.

Amazon earnings results

Amazon’s fiscal 2019 Q2 results missed analyst estimates by a wide margin compared to the previous quarter’s earnings. AMZN stock fell 14% from its July 11 high of $2,025 to $1,748. And AMZN continues to trade in a range between $1685 and $1853.

Amazon’s guidance for its third-quarter results call for revenue between 66 billion and 70 billion. That range represents growth between 17% and 24%, compared to the third quarter of 2018, according to the company’s guidance in its Q2 financial report. 

According to Barron’s, the Q3 average analyst EPS forecast for Amazon is between $3.35 and $6.03 for an average of $4.59 per share. Amazon’s EPS is trending to be around $23.44 per share for the year. That EPS would imply a net income of $11,556, which is about 14% higher than in 2018.

Revenue growth trends

Revenue and net income have grown each year at a 30% annualized rate since 2015. Amazon will be hard-pressed to continue that rate of growth through 2019. Currently, we seem to be seeing a decline in the above-average growth rate Amazon has had over the last three years—and indeed since 2010.

Amazon’s revenue has been growing 30% on average since 2015.
Amazon’s revenue has been growing 30% on average since 2015.

I took the above data from the company’s financial statements, and it gives you a picture of the current growth drivers. The company reports revenue across three segments: North American sales, International, and AWS (Amazon Web Services).

North American growth has stayed very high through 2018. Meanwhile, International growth has been on the decline. But the highest growth appears to be in the AWS area.

AWS began as a data storage service. But it now provides more than 70 services for computer storage, databases, analytics, mobile, the Internet-of-Things, and enterprise applications. And in its first ten years, this segment has grown to the same size that Amazon was after its first ten years. Clearly, the company is planning for this new business line to support its continued future growth.

Amazon’s future growth

Take a look at the data from 2010 to 2018. You can see why Amazon will continue to find growth in AWS.

The North American segment has been seeing strong sales growth. But it comes at a high cost. Expenses are 96% of sales on average, and this makes for a razor-thin bottom line. As it happens, that feature is typical in the retail industry.

The International segment hasn’t been profitable yet. And note that growth here is on the decline.

The AWS segment, although still a small contributor to Amazon’s overall business, has the highest potential to contribute to the company’s growth. This segment has been growing quickly, at an annualized growth rate of 61%. For now, this revenue seems to be coming at a lower cost with expenses 77% of sales on average. The net margin of 23% on average in this segment is much higher than that of the other segments. And with these numbers in mind, we can see why Amazon will grow this business going forward.

Signs of a dramatic slowdown in growth

In the short term, the company will likely have difficulty continuing its current pace of overall growth through 2019. And in fact, Amazon’s growth rate could be showing signs of slowing dramatically.

Take the first two quarters of the company’s net sales for 2019 and factor in its high estimate of 70 billion for Q3 sales. You can see that Amazon would need to have an outstanding Q4 to come close to matching its 2017–2018 year-over-year growth rate of 31%.

If you assume that Amazon will indeed achieve the upper end of its forecast, the company would need revenue growth of 56% from Q3 to Q4 for overall sales matching 30% growth of the 2017–2018 period. We’d need to see revenues of close to 110 billion in Q4.

This would be a daunting task—even if the company has a stellar holiday shopping season in Q4. A more realistic estimate of growth is for sales to rise about 25% in Q4, as they have in the past. In this case, year-end revenue would be approximately 280,679 million. And that would mean year-over-year growth for 2018–2019 at 20% versus the 30% prior-period rate.

Should you invest in Amazon stock?

With this lower growth rate in mind, new Amazon investors may want to wait until after the Q3 earnings announcement—or even next year—before establishing a long position. At the very least, the company needs to earn in the high range of its forecast or higher in Q3. And it will need a very strong Q4 to maintain its very high growth. That could be difficult to do.

Some of the decline in future growth is most likely priced into AMZN stock. But since 2019 could be the first year of declining growth in a very long time, the market could react negatively. Amazon stock could decline in value further.

For long-term investors, Amazon stock will most likely deliver solid returns over time. The company continues to grow its AWS and continues to develop new business lines. CEO Jeff Bezos mentions in his annual letter that AWS was a concept that they dreamed up and implemented before customers knew it was a service they needed or wanted. It’s this spirit of constant innovation and imagination that will most likely keep Amazon growing over the long term.

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