Are Amazon's Days Numbered?

Do weak earnings suggest that Amazon isn't a buy anymore?

Feb 13, 2014 at 2:39PM

As soon as Amazon (NASDAQ:AMZN) reported its fourth-quarter results, its share price tumbled by more than 10%. Did Amazon fail to meet expectations due to core business issues, or did it miss because of some external factors? Let's have a look at Amazon alongside its peers Netflix (NASDAQ:NFLX) and eBay (NASDAQ:EBAY).

Fourth-quarter result
E-commerce giant Amazon posted a rather weak performance for the fourth quarter of fiscal-year 2013. The company reported earnings per share of $0.51 versus the comparable quarter's $0.21. However, the earnings missed the consensus expectations by $0.15. Revenue rose more than 20% to $25.59 billion. Compared to the third quarter's sales growth of 25%, this quarter's sales growth wasn't that impressive as the company didn't do a great job in the holiday season.

The earnings miss in the quarter was a direct result of technical issues at United Parcel Service, which prevented Amazon's orders from being delivered on time. Amazon hired more than 70,000 temporary workers at its warehouses and distribution centers to cater to huge demand in the holiday season. Unfortunately, due to UPS' shipping issues, Amazon wasn't able to enjoy sizable profits during this most-awaited season. In addition, the new workers added to the company's operating expenses, which skyrocketed to $25.07 billion -- 20% more than the last year's same quarter.

Segment analysis
North America

Amazon's EGM business in North America has consistently performed well in the past with double-digit growth in every quarter for the last five years. In the fourth quarter, the EGM business accounted for 69% of revenue for North America as it posted $10.65 billion in revenue, up 25% from the comparable quarter. Amazon's Kindle platform remained one of the major growth drivers with sales that looked solid once again.

For the North America media business, revenue grew 21% from the comparable quarter and contributed 14% of North America's total revenue of $15.33 billion. Amazon Web Services, or AWS, which accounts for just 6% of the company's total revenue, saw tremendous growth of 52% in North America.

International segment

Amazon's international segment saw year-over-year revenue growth of 13% and generated $10.26 billion in the quarter. Amazon's strategy of increasing its offerings of digital video content paid off as its international media business grew more than 53%. EGM also did a great job as it accounted for 63% of total sales in the international market. Revenue for EGM increased 19% to $6.48 billion, while the operating income for the segment grew remarkably by 116% to $151 million.

AWS revenue grew by 26% in the international market. On the whole, AWS generated more than $1 billion in revenue during the quarter. The company is now focusing on the Chinese market for future growth.

What is Amazon up to?
Amazon has announced that it will raise the membership price of its Prime services by $20 to $40; the current membership fee is $79 per annum. Prime members are more valuable to the company, as they do more business with the company than non-members. Amazon offers these members same-day delivery and free 2-day shipping on its items. The reasons for this price hike are higher fuel and shipping costs, which have increased the company's operating expenses. With Prime services getting more expensive, Amazon will lose a lot of customers, which will definitely decrease its sales volume. Whether or not this price increase will help improve the company's bottom line remains to be seen.

For the first quarter of fiscal year 2014, Amazon has a dim outlook, keeping in view its heavy investments. The company's management expects earnings somewhere between a loss of $200 million and a profit of $200 million during the next quarter. Amazon expects sales between $18.2 billion and $19.9 billion, while analysts expect sales of $19.67 billion in the quarter.

Amazon's rival in the online video business, Netflix, is growing at a tremendous pace. The entertainment company has attracted a lot of customers in the last few quarters. In its recent quarter, the company's earnings beat analysts' expectations of $0.66 per share as Netflix posted EPS of $0.79. During the quarter, the company successfully gained 2.3 million US subscribers and 1.74 million customers in foreign markets, as its subscriber base expanded to 44.4 million. To increase its subscriber base even further, Netflix is investing in original programming such as House of Cards and Orange is the New Black.

eBay's PayPal has been performing better than the company's other segments over the last few quarters. In the recent quarter, PayPal's revenue grew by 19%, while revenue growth for its Marketplace stood at 12%. Total revenue for the company was $4.5 billion, up 14% from the previous year's quarter. Earnings also grew by 14% to $0.65 per share. The company's core gross merchandise volume, or GMV, during the quarter increased 14% and mobile volume jumped by 88%. More than 35 million new users signed up during the quarter, of which most were mobile users. Overall, eBay's PayPal looks great. However, it still lags behind Amazon in the online-retailing segment.

Final thoughts
Amazon's dull quarterly performance was attributed to shipping issues at UPS, otherwise, the company's earnings would have portrayed a different picture. The company's full-year earnings finally showed a profit, compared with a loss in the previous year. This proves that Amazon's investments are paying off, although this is taking time. EGM continues to be one of the largest growth drivers for Amazon as the company plans on selling more digital content through this service in the future. Investments in technology and services will continue to add costs for Amazon, but they will pay dividends in the long run. Moreover, the company is expanding its cloud services in China, which will further improve its market share in the region. All in all, Amazon still looks to be in good shape.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends, eBay, Netflix, and United Parcel Service. The Motley Fool owns shares of, eBay, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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