Another stellar quarter for Amazon. Revenue beating by 3.8% and EBIT by 47%. Much as we expected, revenue growth is slowing with C$ revenue up 41% slowing from 42% last quarter, with currency help reported revenue eked out a slight acceleration. North America ex Physical stores saw a 100bps acceleration on a difficult compare, perhaps not surprising given US census Non Store Retail in total accelerated 700bps in 1Q, remember we were at peak covid case rates in mid-January and both January and March saw a stimulus bump. Strong tailwinds for ecommerce spending. International growth was steady at 50% also on a tougher compare. We highlighted last quarter that we would likely see an AWS acceleration soon and we got it this quarter with the segment accelerating 400bps to +32.1%. Other revenue (Advertising) also saw a big acceleration +77% vs +66% last Q. Margins were solid across the board. With 3p seller services up 60%, and 3P unit penetration remaining at 4Q 55% level, as well as the acceleration in the high margin businesses (AWS and Advertising) gross margins were very strong, beating consensus by 120bps, up 115bps YY, and accelerating from -141bps last Q.
With the very challenging revenue growth comparisons, a slowdown is pretty much unavoidable. The top end of 2Q revenue guidance implies over a 1300bps slowdown and that is with shifting Prime Day into 2Q (vs 4Q last year), EBIT guidance as usual is too broad for real directional insight. Historically, the best time to own Amazon is when revenue and gross profit are accelerating in tandem, that’s when the multiple really rips. For the upcoming quarters, the rate of change will rely on the margin story. There is a case for a margin ramp, we’re modeling an accelerating expansion in gross margin in 2Q, as we continue to see a slowdown in retail, but acceleration in the higher margin businesses. Then there is Covid costs and how much can be recouped vs last year. Covid costs are far from done, but there should be moderating spending intensity vs last year as 2021 progresses. Recall that last year the company had $11.5bn in Covid costs, or 50% of EBIT. That could be a big margin tailwind depending on how fast it can be unwound, the company is guiding 2Q to $1.5bn in Covid costs vs $4bn last year. Though given the recent unionization vote that went in the company’s favor, Amazon probably wants to err on the side of higher comp and extra safety for the foreseeable future. It even highlighted on its press release “Our Vision to be Earth’s Best Employer and Earth’s Safest Place to Work” vs the 4Q press release “Investing in Employee Safety and Providing Good Jobs”. So Amazon won’t be ‘squeezing’ SG&A for margin at the expense of safety or paying employees anytime soon.
The 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. AMZN sits on the lower half of our long bias list, we still like the Tail view, but don’t see a catalyst for a higher conviction long over the Trend duration.
Ecosystem Callouts
If there is one conclusion from our ecosystem callouts, it is how the company is being immersed in the consumer’s life far beyond online shopping.
Management highlighted AWS partnership in sports, an interesting development considering incoming CEO Andy Jassy’s connection to sports franchises/leagues. “There's significant momentum around the world, including broad and deep engagement across major industries. For example, last quarter, we announced new commitments and migrations from some of the world's most renowned sports leagues, the National Hockey League, the PGA Tour, Formula 1 and the German Bundesliga.”
Twitch was highlighted in prepared remarks for the first time ever. “Twitch is also seeing great momentum. Hours watched on Twitch nearly doubled year-over-year in the first quarter, and we now average more than 35 million daily visitors.”
Amazon has locked in exclusive rights to Thursday Night Football (previously announced). “We're also continuing to expand our roster of live sports content, and we're excited to partner with the NFL and be the exclusive home of NFL Thursday Night Football into the next decade.”
Grocery continues to ramp. “Grocery has been a great revelation during the post-pandemic period here. I think people really value the ability to get home delivery. And we've seen that as numbers go up considerably pre and post-pandemic.”
Advertising strength context. “traffic has been a large driver of what we're seeing in the advertising space. But it discounts kind of the improvement that we're also seeing, relevancy and new products that the team is, has been rolling out, that the customers also enjoy. So I think the advertising team's done a great job of turning clicks into productive sales”
Fulfillment speed. “I think generally, the speed of innovation is very quick at Amazon, but we always want it to be quicker. And we always want it to be globally consistent, and we want to take the best practices from 1 country to make sure we're doing it the same way everywhere. I think currently on our list right now is that we are in the process of getting our 1-day shipment percentages back up to where they were pre-pandemic. We're there in Europe, and we're starting to see in Europe not only strong 1-day, but also more broad, same-day selection, so they tend to go hand-in-hand. In the U.S., we've made improvements or consistently getting better.”
Prime Video leveraged as an acquisition tool, and some notable content coming down the pike. “I think there's probably nothing new or surprising, but just to reiterate it, we look at Prime Video as a component of the broader Prime membership and making sure it's driving adoption and retention as it is. It's a significant acquisition channel in Prime countries. And that we look at it and see that members who watch video have higher free trial conversion rates, higher renewal rates, higher overall engagement. And there's great examples of places like Brazil, where you launch a video-only subscription, for example, that preceded the broader Prime membership with shipping components, and that was, as an example, a great way to expose people to Amazon.” “We have some big things on the horizon, including Lord of the Rings, and we're very excited about getting that type of content to our Prime members quicker.”
