The 1Q result was very much as we expected, slowing revenues coming in light vs expectations and an EBIT miss. However, guidance for 2Q is where we saw some negative surprise vs our expectations. At first glance the guide suggested a very surprising revenue slowdown to ~5% growth, though the revenue range comes with a 400bps shift from 2Q to 3Q with Prime Day moving from June to July which was announced concurrent with this earnings release. Barring that shift, the guide would imply an acceleration in 2Q. Still even adjusting for the shift, the revenue and EBIT guide for 2Q is below what we expected. We suspect April has been very weak. It was after all the toughest US consumption month in what our Hedgeye Macro team deemed in the uncompable 2Q. Given how bad the start of the quarter likely has been, the growth inflection in the coming weeks is almost guaranteed as the 2nd half of the quarter is facing compares about 30pts easier than the first half of 2Q. Also, given the likelihood of a rough start to the quarter, it's possible management is being extra conservative on guidance for the remainder of the quarter, which is the right way to go. The guidance midpoint suggests a significant drop in the 2 year trend vs what was seen in 1Q. Yet management is saying customer demand remains strong and no real macro factor playing into the guide, rather it's the inflation impact on budgets. The commentary seems to imply management thinks that inflation in necessities is what is eating into discretionary spend vs a curbing of total spend by consumers. Maybe that’s a risk with the greater macro uncertainty we have at the moment. As we look at our Trend model, we still think 1Q could be the business trough, but regardless there is a coming inflection over the next month or so where the model should go from seeing revenue and gross profit growth slowing down to the single digits to accelerating back up to around 30% growth by the back half. We think that inflection will drive the multiple and stock higher. We’re right in the thick of Quad4 in 2Q22, which continues to pressure AMZN but as the P&L accelerates we think we’ll also be shifting out of Quad4 in the coming months and the market signal will turn back to bullish on AMZN.
What We Liked
- AWS continues to deliver great growth at strong margins. 37% revenue growth slowing slightly from +40% last Q but steady on the 2 year, with an acceleration to 57% EBIT growth, and the company continues to invest in AWS infrastructure for continued growth.
- Moderating fulfillment cost opportunity. Management is talking about finally being caught up in fulfillment capacity, and actually having some excess labor at times in 1Q. Excess labor isn’t good, but management noted it's being fixed and is seeing improved efficiency into 2Q. Moderating fulfillment investment and improving labor efficiency suggests an opportunity to drive some leverage in fulfillment as revenue growth accelerates through 2022.
What We Didn’t Like
- The revenue guide was clearly the most negative data point. The 400bps Prime Day shift from 2Q to 3Q has a material impact, but the underlying trend is still slowing materially in that guide. When pushed on details around the guide, management simply noted it's based of what is being seen right now in sales. That suggests a weak April, and perhaps a guide skewed on the conservative side.
- Gross margins were a bit lighter than we expected and in its prepared remarks management highlighted inflationary cost pressures on the business including shipping and elevated fuel costs. Management seems to be tempering expectations around margins from these costs over the next couple quarters.
Ecosystem Callout
The AMZN print looks to be a pretty negative read on April sales for retail, and specifically a risk in ecommerce (a couple of our top shorts ETSY and W report next week). Be prepared for a volatile Retail earnings season in the coming weeks.
Here is a link to our note ahead of the quarter. AMZN | Expect Inflection In 2Q
If interested in our guest speaker call from earlier this week with Hedgeye's legal/policy analyst Paul Glenchur and 3p Ecommerce Lawyer Paul Rafelson on AMZN Regulatory Risk here is the Video Replay Link: CLICK HERE
