Nobody Was Prepared For The Amazon Blitzkrieg

It seems like the technology companies have it in for Mr. Market. With a deaf ear to all the negative press, Amazon (NASDAQ:AMZN) followed Facebook (NASDAQ:FB) to report solid results, allaying fears that the growth in FANG may be nearing its end. Users simply have other things on their minds, and they are what continue to drive revenue to these tech titans.

Amazon fairly smashed estimates, with revenue growing 42.9% to come in 1.7% ahead of the Zacks Consensus Estimate and earnings growing 120.9% to come in 168.0% ahead.

So definitely, there’s something driving that earnings growth. Drilling down into the details, it appears that a favorable mix (North America and AWS increased as a percentage of sales while the loss-making international business declined slightly), decline in all except fulfillment cost as a percentage of sales, increase in other income and a lower tax rate as offset by higher fulfillment cost and interest expense (net) drove the results.

A little over half (52.7%) of Amazon’s revenue came from its online stores, 8.4% from physical stores, 18.2% from third-party seller services, 6.1% from subscription services, 10.7% from AWS and 4.0% from other sources (mainly advertising). The strongest growth is in other, followed by subscription, AWS, third-party seller services and then online stores (sales growth in physical stores that came with Whole Foods can’t be compared since the acquisition was toward the end of 2017). So it does look like the company is firing on all cylinders.

While still tiny compared to Alphabet’s (NASDAQ:GOOGL) Google, Amazon’s advertising business can scale very quickly because of its direct connect with users, its ownership of the leading sales platform and a super personal assistant called Alexa that it’s trying to get into as many devices as possible. Like AWS, this is a much more profitable business than retail so will improve its earnings potential.

The other business growing very fast is subscriptions (last quarter benefited from a change in the revenue recognition method), which will also see a boost from the recent price hike in Prime. Amazon said that Prime was getting more expensive because of the number of things it was adding to the service. So the annual subscription charges were bumped up by $20 to $119.

Amazon/Bezos clearly has a lot of faith in the 100 million strong user base, and it will be good to know how those numbers grow going forward. Even if subscribers don’t grow at all, the price increase will bring in an additional $2 billion for the company right there helping it finance its growing content acquisition/original programming cost.

The guidance is also strong: revenue growth of 34-42%, or $51.0-54.0 billion including favorable currency impact of $1.2 billion or 320 basis points and operating income increase of 75% to $1.1-1.9 billion.

Summing Up

Overall, it was a very good quarter for Amazon, with nothing to suggest any change in its leadership position across retail, cloud and Alexa.

Amazon has a Zacks Rank #1 (Strong Buy) and it’s our strongest bet in the industry. But go ahead and indulge in any of these other Internet stocks because the sector is particularly hot right now: Boohoo (OTC:BHOOY) , IAC/Interactive (NASDAQ:IAC) , PetMed Express (NASDAQ:PETS) , Secoo (NASDAQ:SECO) or eBay (NASDAQ:EBAY) .

You can see the complete list of today’s Zacks #1 Rank stocks here

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