When Amazon (NASDAQ:AMZN) reported earnings Friday, the outlook was decidedly not to Wall Street's liking. Given that the tech titan is still heavily reinvesting in growth, investors always focus less on the bottom line and more on the top: revenues and, in particular, the trends of revenue. So naturally, word that top-line growth was lighter than the market expected shocked Wall Street's optimism a bit. But the bearish response was also an issue of the holiday season forecast -- which, as the company points out, involves by its nature a bit of guesswork.
To help him parse the numbers and the broader outlook, MarketFoolery host Mac Greer has analysts Emily Flippen and Jason Moser join him for this podcast. They'll weigh in on the growth picture for Amazon, its high-margin AWS business, the degree to which the market for Amazon Prime is saturated, the Whole Foods synergy, and more.
A full transcript follows the video.
This video was recorded on Oct. 29, 2018.
Mac Greer: On Friday, shares of Amazon had their worst day in four years, down around 8%. Concerns over slowing growth in the wake up their earnings, Jason. Shares not doing much today. We should add that Amazon is still up around 40% for the year. Perspective is an order. But, what do you make of Amazon?
Jason Moser: Every quarter, when we talk about Amazon earnings, for many of us, the first thing we look to is top line growth. It's less about earnings. We know that typically, they're going to be reinvesting a lot of that money into the business and fulfillment and cloud infrastructure. It's more about top line, less about bottom line.
Taking that into consideration, it makes sense that the market was at least a little bit concerned here. Top line growth was a little bit lighter, perhaps, than what the market was expecting. I think really, the selling is more from the guidance for the holiday quarter. It's difficult for Amazon to go in there and offer a tight window of where they see that top line going. They even made the point in the call that really, most of their money in this holiday quarter is made from this tiny window between the middle of November toward the end of the year, and it's just difficult to predict. They offered a range. That range didn't quite meet up with what the market was hoping for, and you get the sell off.
But it's not to sit there and think, "This is a business in trouble." Clearly, it's not. But it's a business that does a lot of different things. I think one point worth noting is that when you look at the actual retail business, third-party sales now represent 53% of total units sold on the platform. What that means is that Amazon is bringing outside partners in and using their commerce platform to sell their stuff. It's terrific. It's very profitable, but it does play out on the top line number a little bit.
Taking everything into consideration here, I think they're doing a lot of great things. Amazon Web Services continues to grow. It's now a $26 billion run rate. That was $18 billion a year ago. So, let's not get too worked up. I'm going to hang on to my shares for now.
Greer: OK, deep breath. I'll keep my shares, as well. Emily, what do you think?
Emily Flippen: I totally agree. I think the high-margin business, which is the Amazon Web Services, is really going to be the main growth driver for Amazon, along with initiatives that the company probably hasn't even thought about yet. This is a blip on the radar.
I will just add, though, that I think a lot of concern is coming from the growth of Prime subscribers, and the question of whether or not the market has been tapped out for people who are going to pay a premium of $119 a year for a Prime subscription, especially when you have a lot of people who have one account per family. Is the growth there really maxed out? And did they achieve the Prime customer growth that they were hoping to when they acquired Whole Foods, and started doing the discounts for Amazon Prime members at Whole Foods? Was that a better deal for Whole Foods than it was for Amazon Prime? I think that's to be determined. Either way, I think it's going to be concerning for a lot of people, seeing the growth of Prime subscribers starting to slow down as the market begins to get tapped out.
Moser: We're faced with the conundrum of Prime or Costco, Mac. Which way do you go?
Greer: Oh, my gosh!
Moser: Is it one or the other?
Greer: That's Sophie's Choice. That's a totally offensive analogy and I apologize, but I never want to be left with that. I would probably choose Amazon over Costco, if I had to say that and please do not repeat that to Jim Sinegal. But I don't have to. I don't have to. This morning, we ordered something on Amazon, and it's coming later today. My question is, do they have a distribution center in our front yard now? I mean, how?! That's voodoo magic. I don't understand it.
Moser: The past couple of years, they've spent a little bit more on fulfillment than they had historically. They have made the point here that this holiday season, they're going to be spending a little bit less, because they've spent so much in the preceding couple of years. That could play out on the bottom line favorably for them. Whether it does or not, I don't know that it really matters. But it's worth noting. They continue to invest a lot in fulfillment.
Bottom line is, much like Costco, Amazon is looking to provide low prices and awesome customer service. There was a quote on the call. For me, this was the best quote of the call, and it's the best quote I've heard from them in some time. It came from Dave Fildes, the director of investor relations. He said, "It's easy lower prices, but it's much harder to be able to afford to lower prices." That, to me, tells you everything you need to know. That really, I think, is the crux of the competitive advantage. Anybody can lower prices, but can you afford to do it? And for a while, it didn't look like Amazon really could, until they could.
Greer: That makes a lot of sense. I'm thinking back to your question again, and I don't like my answer, so I'm going to modify it and say that I don't want to give up Amazon or Costco. Costco has the treasure hunt. Amazon will never, in my humble opinion, be able to replicate that treasure hunt mentality. That's a wonderful thing. And, they don't have the free samples. You're not getting free samples on Amazon.
Moser: It's a fair statement!
Greer: OK, so, lay off Costco.