Source: Amazon.com.
Amazon.com (AMZN 1.30%) is scheduled to report fourth-quarter earnings on Thursday, Jan. 29, after the market close. Amazon stock is down by almost 22% over the past year, as investors are increasingly disappointed with the company's widening losses and falling profit margin.
However, Amazon is focused on maximizing value in the long term and capitalizing on its growth opportunities over a period of decades, even at the expense of short-term profit margin. With this in mind, let's look at Amazon's coming earnings report and why it could be so important to look beyond the headline numbers when analyzing the company.
The context
Amazon stock fell by nearly 10% after the company announced its third-quarter earnings in October. Sales during the quarter grew by a healthy 20.4% year over year, but they were still below Wall Street forecasts. In addition, earnings per share missed expectations by a considerable margin.
The company is aggressively investing in building its distribution network, digital content, and its Amazon Web Services cloud computing division, among other segments. This is clearly taking its toll on profits, and rising expenses in items such as "fulfillment" and "technology and content" are a big drag on earnings.
Making things worse, sales guidance for the crucial fourth quarter was below expectations, which generated even more concern among investors. Amazon produces about a third of its annual revenue in the holiday quarter, so this period obviously has a big impact on overall annual performance.
What's bad for eBay can be good for Amazon
Competitor eBay (EBAY 0.61%) recently announced dismal e-commerce sales for the fourth quarter. Its marketplace revenue grew by a marginal 1% year over year, to $2.3 billion, while gross merchandise value increased by only 2% from the fourth quarter in 2013.
On one hand, this can be interpreted as negative news for Amazon, perhaps indicating brick-and-mortar stores are successfully expanding online and regaining some of the ground they have lost to e-commerce retailers over the last several years. However, Amazon and eBay are direct rivals in e-commerce, so chances are Amazon is also taking home some market share gain thanks to eBay´s problems.
The headline numbers
Wall Street analysts on average forecast $29.7 billion in fourth-quarter sales, which would represent a 16% increase from the same period of 2013. Amazon expects sales in the range of $27.3 billion to $30.3 billion, so analysts' average expectation is near the top end of the company's remarkably wide guidance range.
Analysts also expect Amazon to take home earnings per share of $0.17 for the fourth quarter, a big decline from $0.66 per share in the same quarter of the previous year. This reflects the impact of growing costs on profit margin, and nobody should be too surprised to see material margin pressure during the quarter.
What you need to watch
Amazon is all about investing for growth and maximizing its long-term opportunities, so investors might want to pay particular attention to the company's fundamental drivers.
The company announced that more than 10 million new members tried Amazon Prime for the first time during the holidays. This bodes remarkably well for the company over time, as Prime is a powerful tool to build customer loyalty and consolidate the company's leadership position in online retail.
On a short-term basis, however, Prime free trials will most likely negatively impact margins due to rising fulfillment costs that are not accompanied by associated revenue to compensate. This, though, shows why paying too much attention to the headline numbers can give you the wrong impression about the health of Amazon's business.
Amazon's investments in buildings and machines are a major drag on earnings due to depreciation and amortization expenses, but cash flow can nicely differentiate between expenses related to operating the business and costs associated with investments for growth.
Amazon reported a 15% increase in operating cash flow through the year ended in September. While earnings are declining, cash flow is doing much better; long-term investors in Amazon stock might want to focus on this metric, which provides a more adequate metric for Amazon, which is dynamically investing tons of money to plant the seeds of long-term growth.
