AMZN | Hairy

07/25/19 08:47PM EDT

Revenue beat with an earnings miss, it’s like the old days of Amazon when earnings didn’t matter. But I think today they do. Still these are impressive absolute results from Amazon, you have to acknowledge a consumer company at $250bn in revenue growing 20% is impressive. But beyond the accelerating paid unit growth driven by accelerated share gains in NA from 1day shipping, almost everything else from a rate of change perspective was worse, and rate of change matters, especially at 60x EPS. Amazon is gaining share in retail, but clearly at a higher cost today.  Our read is this is very bearish for the TREND, but net bullish for the TAIL. We’re short the stock today due to slowing EBIT growth, at the same time we’re in Macro Quad 4 – they don’t get along as it relates to the stock price.


Revenue

  • North America Revs were solid accelerating to 23% growth (excl. physical stores) from 19% last Q, that’s 130bps acceleration on the 2yr.
  • Physical stores were flat (+1% C$), despite adding more Amazon Go Stores, Whole Foods still underwhelming.
  • International basically held trend at 17% growth vs 16% last Q, steady on the 2 year.
  • AWS slowed 410bps to 37% growth, a 190bps slowdown on the 2 year.  Management’s response to the “why AWS slowdown” question wasn’t bullish, basically implying law of large number pressure, meaning analysts likely have to start revising down the growth rate.
  • Other (Advertising) grew 37% accelerating 300bps but slowing 200bps 2 year basis.


Margin

  • Gross margin expansion slowed big to 61bps whereas it had been trending up 200-400bps in recent quarters, meaning gross profit growth slowed 540bps to +21.6%, the lowest level seen since the great recession.  Part of this was likely shipping costs, which accelerated to 36% growth from 21% last Q.  That acceleration from trend growth looks to be about an incremental $825mm or 130bps of pressure.
  • Every line of operating expenses accelerated meaningfully, indicating Prime 1day investment may be impacting more than shipping and fulfillment expense.  Management said as much on the call.
  • EBIT margin was down for the first time in 7 quarters, declining 78bps.  We can point to 1day shipping and the incremental $800mm plus, but that amount is still only 125-175bps. Last Q the margin was up 360bps, so there is a lot less underlying margin expansion than had been trending.
  • AWS EBIT margins were down for the first time in 7 quarters.  Company noted accelerating investment in 2019, implying that it may have underinvested and over-leveraged in 2018.
  • Company is now lapping Prime price increase in June of last year which pressures both margin and top line some.


1 Day Shipping

  • The company is crediting essentially all of the acceleration in 2Q to 1day prime shipping, and it is also likely driving the solid 3Q revenue guide as it was noted Prime Day was successful with 1day shipping adoption. 
  • In 2Q 1day drove higher units, with somewhat lower ASPs. But the higher unit growth is coming at a clear cost.  Management stated it exceeded its $800mm guidance of incremental costs for 1day, and it's not even guiding 3Q except to say costs are higher than 2Q, as it doesn’t know exactly how much it will be or where all the costs will be going/coming from.
  • The company also indicated that 1day shipping is requiring greater inventory buying and more moving of inventory around.  So capital requirements are going up while expenses are going higher to maintain the revenue growth rate we expect to see from AMZN.
  • The implementation of 1day shipping in 2Q was mainly US, international 1day is coming in future quarters.


Macro Quad 4

The other big callout we highlighted in our Retail Direct email a couple days ago is how AMZN stock hates Macro Quad 4 (Hedgeye speak for both US economic growth and inflation slowing at the same time).  Our macro team has made the call of Quad4 in Q3 2019 which we see playing out in the data over the next 3-4 months. AMZN's historical returns during Quad 4s have been poor (below). The average return is negative 1% and it has a U shaped histogram implying high volatility with the most populated bin as being the 20%+ decline.  Quite simply the historical math says don’t own AMZN in Quad4. And yes, we’re currently in Quad 4.

AMZN | Hairy - 7 25 2019 AMZN chart1
AMZN | Hairy - 7 25 2019 AMZN chart2


Ecosystem Reads

1Day Share Acceleration

  • Paid Units accelerated to 18% from 10% last Q.  The company is crediting all of it to 1Day Prime shipping.
  • The press release comment from Bezos stated: “Customers are responding to Prime’s move to one-day delivery — we’ve received a lot of positive feedback and seen accelerating sales growth... Free one-day delivery is now available to Prime members on more than ten million items, and we’re just getting started.”
  • This is telling us that shipping speed matters.  We hit on this in our TGT short black book last week (Link: CLICK HERE).  Amazon is the leader, WMT is investing heavily to hold a 'within reach' 2nd place, TGT is investing in stores and store fulfillment rather than distribution capabilities for speed of delivery.
  • Bezos believes in the long run the consumer will care about price and convenience; the latter includes fast speed of delivery, the former implies for free.  Marc Lore (WMT) subscribes to the same mindset.  TGT doesn’t appear to be investing in speed in the same way, we think this is very bearish for TGT over a tail duration.

AMZN | Hairy - 7 25 2019 AMZN chart3


Beware the Devices

A couple highlights on devices appeared on the AMZN press release (below).  Amazon has been losing money for years to put as many Amazon devices into shoppers’ hands as possible.  Don’t underestimate the potential consumption behavior changes that these could create and the fact that Amazon has more data on the impact than anyone.

-Fire TV now has more than 34 million active users worldwide and continues to be the #1 streaming media player family in the U.S., U.K., Germany, Japan, and India.
-The number of Alexa-compatible smart home devices continues to grow, with more than 60,000 smart home products from over 7,400 unique brands.

AMZN | Hairy - 7 25 2019 AMZN chart4

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