What We Liked:
Gross Margins. We said last quarter that if there was a bull case around AMZN it would be around margins. Gross margins delivered this Q with an acceleration to +247bps YY vs 115bps last quarter. That was driven by acceleration in the high margins businesses of AWS and Advertising, which we signaled to happen last quarter. Unfortunately with revenue pressure the total margin profile is unlikely to be bullish enough over the trend.
What We Didn’t Like:
Revenue trend and Opex Deleverage. The big slowdown in revenue was inevitable, but we thought the 2 year trend for AMZN would hold in better than it did especially in the context of a Prime Day shift back into 2Q vs fall of last year. 2Q Census Nonstore Retail has slowed to high single digit in the last couple months around the time that AMZN management is saying revenue has slowed to mid teens. Two quarters ago AMZN NA segment growth was 21pts ahead of Census Nonstore Retail, this quarter it was down to 11pts. Even International, where the pandemic is still a greater concern, saw a material 2 year slowdown. US census retail data remains strong, so the online weakness is being driven by a shift to B&M (chart below). It's an important chart as it relates to timing the trade of retail. With that revenue pressure came big deleverage of opex, particularly in the context a massive ramp in marketing spend up 73% YY vs 29% last Q, a 700bps acceleration on the two-year. Management is also talking about wage pressure driving costs up, which combined with the marketing move means there is less SG&A opportunity that previously thought with the company lapping nearly $12bn in covid costs from 2020.
Stock View:
Our view after last Q was “fundamental Trend setup here is mixed. Street earnings look too low but barring some big margin upside, we’re not sure the multiple is likely to go up in the context of slowing revenue and looming scrutiny from regulators.” Now with revenue pressure making the margin story less bullish, the fundamental view over the next couple quarters is not good. At the same time EPS is likely to grow 20%+ in 2021 (though with 2H most likely negative) and the street is probably going to over shoot estimates to the downside. The trading reads had been bullish for AMZN, and normally this is the type of stock you want to own in Macro Quad 3, but not if its seeing crashing revenue growth and rising costs. We’ll see how the market reacts tomorrow and make our decision after.
Wayfair Read:
Normally there isn’t a ton gleaned from an AMZN print about W. But given the revenue growth falloff, and the comments from OSTK about weak online home sales spend this morning, its clear that dollars are shifting away from online and even more away from online home. W is likely to see big revenue pressure at the same time the giants like AMZN are going to be more aggressive in trying to gain share. The W short call is playing out exactly as we expected with SG&A rising as revenue growth is crashing and competitive intensity is accelerating. Still a ton of downside potential in Wayfair.
Sales Commentary:
Amazon gave more detail on intra quarter trends than we can ever recall them doing, for that reason here is what management said:
“Our second quarter net sales were $113 billion or at about the midpoint of our guidance range. That's a year-over-year increase of 27%, or 24% excluding the impact of foreign exchange, and included the shift of Prime Day into Q2 this year, which added about 400 basis points to the year-over-year growth rate. Q2 of this year was a transition period for many of our customers. As the quarter progressed, people were at home less as restrictions and lockdowns eased in some of our largest geographies, including the U.S. and much of Europe. As a result, while Prime members continue to spend more with us, growth in Prime member spend moderated compared to spending seen during the peak of the pandemic.
As you look at our recent revenue growth rates, I want to give you some insight into what we are seeing as there have been some noticeable intra-quarter changes in our revenue run rate. Prime Day has also been in 3 different quarters the past 3 years so I will normalize for this impact on my growth rate comments. Also since FX rates have bounced around, all of my comments exclude foreign exchange.
Here's a quick recap of our growth rates in 2020 and 2021. First, before COVID-19, we've been growing at a revenue growth rate close to 20%. 2019 full year growth was 22%, and revenue growth for the first 2 months of 2020 was 21%. Once the pandemic hit and lockdowns began in March 2020, the initial growth rate jumped into the mid-30% range. Q1 of last year ended with a revenue growth rate of 27%. However, our operations network took time to step-up to serve this growth in demand due to space constraints and our need to ramp up hiring quickly while prioritizing employee health and safety.
By mid-May of last year, we have made good progress to open up more capacity by adding hundreds of thousands of employees. This allowed our revenue growth rate to jump to the 35% to 45% range and remained at that level through Q1 of this year when we had 41% growth. In Q2 of this year, we began to comp this high sales period from last year, and the year-over-year revenue growth rate has narrowed. It has also narrowed as vaccines become more readily available in many countries and people are getting out of their homes.
Since May 15, again, excluding Prime Day, our year-over-year growth rate has dropped into the mid-teens. Our Q3 revenue guidance range of 10% to 16% growth reflects an expected continuation of this trend. Given all this volatility, it's useful to consider the 2-year compounded annual growth rate, which remains strong in the 25% to 30% range. Recall this compares to our pre-pandemic growth rate of 21%. This reflects the acceleration of Prime membership and Prime member purchase levels over the past 18 months.
While I'm not giving forward guidance beyond Q3 of this year, we do expect this pattern of difficult year-on-year revenue comps to continue for the next few quarters. As we move forward and start to comp COVID's impact on our revenue growth, we encourage you to also look at the multiyear compounded annual growth rate since the onset of the pandemic to better put this growth in perspective.”
