What Amazon needs from its "record" holiday season
Though Amazon (AMZN) announced late Sunday that it had a "record" holiday season, Wall Street isn't ready to declare it a Christmas miracle quite yet. While the stock climbed 1.9 percent, or $12.41, to $675.20 on Monday, long-standing concerns about the company's profitability are only just beginning to fade.
Amazon's annual holiday results announcement offers an array of impressive statistics, such as that more than 200 million items were shipped this year with Amazon Prime and that 3 million customers signed up for the $99-per-year service in the second week of December. These customers, who get free two-day shipping, received access to 30,000 "Lightening Deals," up from 25,000 last year, the company said.
Prime members account for roughly 25 percent of Amazon's total and generate more than half its overall revenue, according to Barlcay's analyst Paul Vogel.
Investors, though, were already expecting the Seattle-based company to have a jolly holiday season as shoppers continue to shift their spending online. That's a primary reason shares of Amazon have risen 117 percent so far this year, outperforming other tech heavyweights such as Google' parent Alphabet (GOOG), which have gained 45 percent, and Apple (AAPL), which fell 3 percent.
For 2016, trends are expected to remain positive for Amazon.
According to Forrester Research, e-commerce spending should hit $334 billion in 2015 and increase at a compound annual growth rate of 10 percent during the next five years, reaching $480 billion.
Amazon also is benefiting from the strength of its Amazon Web Services (AWS) cloud business, which saw revenue grow 78 percent to $2.1 billion in the third quarter. Operating income at AWS surged to $521 million, compared with $98 million during the year-earlier period. One reason AWS has been a bright spot is that it has more than four times the computing capacity than the next 14 largest providers combined.
"Between AWS (and) increased prime memberships and increased third-party sales, I think the fourth quarter is shaping up not only to be a record sales quarter for the company but also a strong profitability quarter," said R.J. Hottovy, an analyst with Morningstar, in an interview. "It seems that the narrative that this company can't turn a profit is starting to fade a bit."
Amazon has proven to be challenging company for Wall Street analysts to cover because it's unpredictable and offers vague financial guidance. For instance, it's forecasting fourth-quarter operating income to be between $80 million and $1.28 billion. This leaves plenty of room for error for the company's most important quarter.
"You can drive a truck through their fourth-quarter operating income range," Hottovy said, adding that Amazon's results have exceeded analysts' expectations for the previous two holiday periods and should be able to do the same this year.
Amazon, though, is also a big spender, which has hampered its profitability over the years. Selling, general and administrative expenses skyrocketed more than 313 percent to $25.37 billion in 2014 compared with $6.13 billion in 2010. During that time overall revenue surged to $88.9 billion from $34.2 billion, a gain of more than 161 percent.
However, Amazon has reported net income of more than $100 million in only one of the past five quarters and reported losses in two of them.
"We think some investors are still hesitant that Amazon could reenter a heavy investment phase (possibly to expand same-day delivery services), which could pressure margins again. But we think investments in automation and robotics, as well as an apparent stabilization in pricing at AWS, should be a positive for margins at least through the first half of next year," wrote Vogel. He rates the company's shares as "outperform."