Huge headline quarter for AMZN – putting up $7.09 vs the Street at $4.71 (51% beat). Impressive – though keep in mind that the average beat for AMZN over the prior four quarters was 90%. The market was expecting this. But for the biggest growth stock in a generation, I’m going to pay for top line growth – and the results there were ‘meh’ relative to the bottom line beat. By the muted upside in the stock after hours, the market appears to agree. Total revenue was up 19% in C$ slowing 200bps vs last quarter, North America was up 17% slowing 100bps vs last Q (though on a tougher compare), International up 16% slowing 300bps vs last Q(slowed 200bps on the 2 year), and AWS up 42% slowing 400bps (steady on 2 year). Did you read the word “slowing” a lot there? Online stores were up just 12%, and units were up just 10%. Advertising (other revenue) slowed to 36% from 97% last Q hitting its first real tough growth compare.
Maybe I’d pay up more for earnings vs growth if it is clear that the company was pulling every margin lever at once, unlocking its tail earnings power today – and making what appears to be an expensive stock much more reasonably valued. But I don’t think that’s the case. Not 10 minutes into the conference call, the company noted that it’s currently working on evolving prime free two-day shipping program to be a free one-day shipping program. That’s $800mm in incremental spend, just next quarter. That’s the right move – especially when competitors like Wal-Mart and Target incrementally pushing towards same day grocery delivery. But make no mistake, after taking a few steps back in investing in recent quarters, this company is taking an investing step forward, which gives me pause in straight lining the margin/earnings upside throughout the year – the same year where the retail macro backdrop will likely result in half the level of total retail top line growth than in the past 2 years. Punchline here is margin expansion is in expectations, investment is accelerating, and revenue is slowing. If AMZN can’t keep up this level of profitability when growth is slowing on the margin, there’s real multiple risk for one of the highest-expectations stocks in the market.
As noted earlier today, out of any name on my Short list, the call I’m least wed to is AMZN. But our short call on Amazon has not been about any structural problem or wildly ambitious street numbers, rather it’s the multiple risk of a massive growth stock when competition and a slowing US consumer drives lower revenue and gross profit growth results than people expect with overall slowing on the margin. After all, it’s tough to find an example of multiple expansion in a growth stock when the top line is slowing. Also, investors should remain aware of Amazon’s appetite to invest (which it validated with soft 2Q guide), especially as the retail environment weakens (ie competitors become more vulnerable). All of the signals from Amazon lately had been about initiatives to drive better profitability and better margins, as proven this quarter with every margin line improving in this print. But we have seen in the past how quickly Amazon can go into SG&A ramp mode when it sees market opportunities, and we are seeing it again with this move to 1-day free shipping for Prime. We’ll most likely be long Amazon again in the not too distant future, but the trend setup we see in 2019 is bearish for a stock at 62x earnings. Here's the Crux of our Short call on AMZN
