Amazon Soars After Blowout Q4 Earnings Smash Expectations, Joins $1 Trillion “Cuatro Comas” Club

Last quarter, when Amazon reported otherwise respectable Q3 earnings, the market hammered the stock after margins unexpectedly shrank to a 6 quarter low, its AWS cloud segment disappointed, and Amazon guided to surprisingly disappointing operating income guidance. But it wasn’t just last quarter: AMZN shares closed lower the next day after four of the past five announcements. Such earnings disappointments were sufficient to create a material schism between the rest of the FAANG complex, which soared higher in the post-QE4 period, and Amazon which has failed to make much headway.

Well, Amazon’s period in the penalty box is finally over, with the stock soaring 15% after hours after it reported Q4 earnings, joining its FAANG peers in the quatro commas club with a market cap finally well over $1 trillion.

Here is a summary of the fourth quarter highlights:

• Q4 Net Sales $87.4B, above the consensus estimate of $86.17B, and above the high end of the company’s own range of $80-$86.5BN
• Q4 EPS $6.47, smashing expectations of $4.11
• Q4 operating income $3.88 billion, up 2.5% y/y, and also smashing estimates of $2.75 billion
• Q4 AWS Net Sales $9.95B, also modestly beating expectations of $9.89B, and up 34% Y/Y, a modestly slowdown from 45% a year earlier

In short, Amazon beat analyst expectations across the board during the holiday quarter: on revenue, operating income, and AWS sales (barely). Impressively, Jeff Bezos even defied predictions for a slump in net income, pulling in $3.26 billion, from $3.02 billion a year earlier.

Looking to Q1 2020, guidance was also solid:

• Net sales are expected to be between $69.0 billion and $73.0 billion, or up between 16% and 22% Y/Y, vs Est. $71.56BN.
• Operating income between $3.0 billion and $4.2 billion, compared with $4.4 billion in first quarter 2019.

It is worth noting that the guidance includes approximately $800 million lower depreciation expense due to an increase in the estimated useful life of our servers beginning on January 1, 2020.

And yet, despite the otherwise impressive outlook, taking the midline of Amazon’s Q1 revenue guidance of $71BN would indicate another modest slowdown in total revenue, the lowest since March 2018.

Another potential blemish: after the company’s profit margin nearly doubled to an impressive 7.4% in Q1 2019, largely thanks to the increasing contribution from AWS, in Q2, Q3 and then again in Q4, profit slumped again, and the profit margin of 4.4% was the lowest going back to Q1 2018.

Meanwhile, even though AWS beat revenue expectations of $9.89BN, reporting $9.95BN in sales, the growth rate continues to decline, and in Q4 dropped to 34%, the lowest on record.

As usual AWS was the primary source of profit, and with $2.6BN in operating income (up from $2.2BN a year ago) or 67% of the company’s total operating income of $3.879. Meanwhile, the international division continues to burn cash, and despite generating $23.8BN in sales, it resulted in yet another loss of $617MM in Q4.

To summarize, AWS revenue growth:

• Q1 2018: 48%
• Q2 2018: 49%
• Q3 2018: 46%
• Q4 2018: 46%
• Q1 2019: 42%
• Q2 2019: 37%
• Q3 2019: 35%
• Q4 2019: 34%

The good news however is that after declining for a year, AWS operating margin finally posted a modest rebound:

• Q1 2018: 25.7%
• Q2 2018: 26.9%
• Q3 2018: 31.1%
• Q4 2018: 29.3%
• Q1 2019: 28.9%
• Q2 2019: 25.3%
• Q3 2019: 25.1%
• Q4 2019: 26.1%

None of these potential red flags mattered to investors however, who focused on the solid beat and the impressive guidance, and pushed the stock as much as 15% higher, to a new all time high above $2,100 and a market cap over $1 trillion.