On Thursday evening, multi-faceted tech giant Amazon (AMZN) released the firm's first quarter financial and operational results.
For the three month period ended March 31st, Amazon posted GAAP EPS of $0.31 on revenue of $127.358B. These top and bottom line results both beat Wall Street's expectations, while the revenue print was good enough for year over year growth. The EPS print also showed growth as serious improvement was experienced throughout the firm's statement of operations.
Net product sales increased just 0.1% over the year ago comp to $56.981B, while net sales of services grew 17.3% to $70.377B. The cost of these sales increased 1.9% to $67.791B. Fulfillment costs grew 47.5% as costs associated with technology and content increased 41.2%. Sales & Marketing costs, and administrative expenses were also up double digits. This pushed operating expenses 8.7% higher year over year to $122.584B, leaving operating income at $4.774B, which beat expectations and was good for annual growth of 30.1%. Operating margin improved to 3.75% from 3.15% for Q1 2022.
After accounting for interest, taxes and non-operating expense/income, net income improved to $3.172B from $-3.844B for this period last year. While this result is inclusive of a pre-tax valuation loss of $500M associated with the firm's investment in Rivian Automotive (RIVN) , the firm's total non-operating expense/income of $-655M for this period pales in comparison to the $-8.934B posted for this line item 12 months ago.
Geographic/Segment Performance
- North America: Sales increased 11% to $76.881B, producing operating income of $898M (-42.7%).- International: Sales increased 1.3% to $29.123B, producing operating income/loss of $-1.247B (+2.7%).
- Amazon Web Services (AWS): Sales increased 15.8% to $21.354B, producing operating income of $5.123B (-21.4%).
- Online Stores: Sales contracted 0.1% to $51.096B.
- Third-Party Seller Services: Sales increased 17.7% to $29.82B.
- Subscription Services: Sales increased 14.8% to $9.657B.
- Advertising Services: Sales increased 20.7% to $9.509B.
- Physical Stores: Sales increased 6.6% to $4.895B.
- Other: Sales contracted 55.4% to $1.027B.
Guidance
For the current quarter, Amazon expects to generate net sales of $127B to $133B, which is more or less, in-line with Wall Street's consensus view for $129.8B. This would come to year over year growth of 5% to 10% if realized. The firm's expectations for current quarter operating income are being seen as somewhat disappointing by overnight traders, as the firm projects between $2B and $5.5B for this metric. While the midpoint there compares well to the $3.3B print for Q2 2022, it falls short of the $4.4B that Wall Street had in mind.
Fundamentals
The firm points out in the press conference that free cash flow for the trailing 12 months was $-3.3B, because, while still quite awful, it compares nicely to the absolute trainwreck ($-18.6B) that was the 12 months ended with Q1 2022. For the quarter reported, operating cash flow printed at $4.788B.
Out of that, the firm spent $14.027B on property and equipment. Tack on principal repayments of finance leases came to $1.38B. Well, you can do the math. At least the firm does not pay a dividend and had the good sense not to repurchase any common stock over the past three months.
Turning to the balance sheet, Amazon ended the period with a cash position of $64.405B. This is down more than 8% over just the past three months. Inventories were down small to $34.17B. This left current assets at $136.221B. Current liabilities were also lower, down 5% over three months to $147.57B. This puts the firm's current ratio at 0.92, which does not really pass muster where I come from.
That said, current liabilities do include $14.281B worth of unearned revenue, which is not a financial liability at all, but a total of labor or services owed. Omitting this line item would get the firm's current ratio above the 1.0 level, which is what investors generally like to see. Then again, once inventories are omitted, the firm's quick ratio drops to 0.69, and while exceptions are largely made for the impact of inventories on quick ratios for retailers (as retailing is generally an inventory-based business), this is a level that requires forward looking attention for those invested in this name. This ratio is down from 0.72 three months ago.
Total assets amount to $464.378B. This includes goodwill of $22.749B, which is no problem at all for a firm of this size and with this level of public exposure. Total liabilities less equity comes to $309.852B, including long-term debt of $67.084B. While this balance sheet does not require a failing grade, as the firm's cash position can almost cover its long-term debt-load, this balance sheet is far from where I would like to see it. We'll give it a passing grade, but the kind of passing grade that one does relish having to get signed by their parents.
Wall Street
Since these earnings were released last night, I have come across 14 sell-side analysts that are both rated at a minimum of four stars by TipRanks and have opined on AMZN. After allowing for changes, all 14 rate the stock either at a "buy" or their firm's buy-equivalent rating. One of these 14 analysts one chose not to set a target price.
Across the other 13 analysts, the average target price is $140.46 with a high of $165 (Eric Sheridan of Goldman Sachs) and a low of $125 (James Cordwell of Atlantic Equities). Once omitting these two as potential outliers, the average across the remaining eleven analysts drops to $139.64.
My Thoughts
I am not nearly as giddy on this stock as the rest of Wall Street seems to be following this report. About the best that I think can be said is that the ship appears to be headed toward stabilization. It's not there yet, not by a long shot. AWS, which has been the firm's driver for growth as well as margin, is seeing a deceleration in both growth and margin as both Microsoft (MSFT) and Alphabet (GOOGL) appear to be outperforming the market leader at this time.
The firm's e-commerce business, that is the driver for its advertising business, appears to be stalling. Guidance is "meh." Free cash flow is still something out of a horror movie, and the balance sheet continues to struggle to remain "just barely okay."
I have seen absolutely nothing in these numbers that would provoke me to pay 70 to 80 times forward looking earnings for this stock. This is not a growth stock and unlike Meta Platforms (META) , which I sold out of yesterday, this name is not a cash flow beast. What if this is it? What if this is all that Amazon is? It will have to get cash flows right and fix the balance sheet. Only then could it initiate a dividend that would attract some investment. Other than that, tell me why I should pay these prices for a stock that could very realistically be re-rated at a greatly reduced valuation.
The best thing Amazon could do now, would be to aggressively accelerate its cost cutting program. That's the one path I see that could improve this situation the most quickly. Before that valuation starts to really crumble.
Readers will easily see that AMZN has retaken its 200 day SMA (simple moving average) and has a technical chance to break-out. That said, the stock will run into its 38.2% Fibonacci retracement level (of the November 2021 through January 2023 sell-off) at close to $122. So, yes, technically, there could be another 10% to 11% in these shares.
That said, the shares should struggle this morning, and if that 200 day line is lost, the 50 day SMA ($99) becomes either support, or should something more significant happen, a downside pivot.
I am not saying that if you are long these shares that I am necessarily right and you are necessarily wrong. I am saying that the firm has not given me reason enough to allocate my capital here, given the "out of touch" valuation. Want to see this stock pop? Jeff Bezos announces a comeback. That would provoke an algorithmic feeding frenzy.
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