2019 tested the mettle of shareholders of Amazon.com (NASDAQ:AMZN). While the stock rose 23%, it still underperformed the S&P 500 by nearly 6%. Slowing revenue growth and a net income decline to close out the third quarter didn't help, but looking beyond the surface shows things aren't always what they seem.
The company will be making its case to investors when it reports its fourth-quarter financial results after the market close on Thursday, Jan. 30. Let's look at a few areas to watch when Amazon reports earnings.
1. Revenue growth
After years of soaring sales, it appears that Amazon's stratospheric growth may have finally caught up with the company. In the third quarter, net sales grew by 24% to $70 billion, though it was down from the 29% growth in the prior-year quarter. The pattern of decelerating revenue increases has investors concerned that Amazon's best growth days may be behind it.
It's important to note, however, that Amazon's international expansion is ongoing and, over the past several years, the company has launched operations in Turkey, Australia, Mexico, Brazil, and India. Analyst Mark Mahaney of RBC Capital Markets things the opportunity is vast. "These five countries offer Amazon a very large, underpenetrated market opportunity," he said in a note to clients late last year. "We believe that investors may underappreciate the potential of these markets." India alone could represent 13% of Amazon's international sales and 4% of the company's total revenue by 2023, according to Mahaney's calculations.
Global growth could help reignite Amazon's sales in very short order, something investors will be watching for.
2. One-day shipping
Early last year, Amazon upped the game for its competition. After offering two-day or faster shipping for years, the company announced the debut of a one-day standard delivery option for many of its products.
The downside to such a revelation was the additional cost necessary to make those speedier shipments happen. At the time, Amazon said it would spend an incremental $800 million in the second quarter alone to fund the initiative. The company said that amount increased in Q3 (without providing specifics) and said shipping costs would increase by a whopping $1.5 billion in the fourth quarter, the result of holiday shopping.
Amazon execs pointed out that there's been a revenue acceleration since the introduction of one-day shipping, as a greater pool of products are now being considered by customers because they can get them faster. Additionally, the company will realize certain efficiencies within its logistics network and productivity gains that will defray the costs over time, similar to its initial foray into two-day shipping.
Investors will be watching for updates regarding the impact of its speedier deliveries.
3. Margin expansion
Prior to the introduction of its one-day shipping, Amazon had produced several successive quarters of expanding operating margins. In response to its slowing revenue growth, Amazon adjusted the mix of products qualified for two-day shipping, increased the quantities necessary for others, and worked to eliminate unnecessary packaging.
These measures were extremely successful, boosting margins and helping the company's net income more than double year over year by the first quarter of last year.
Since the introduction of one-day shipping, however, Amazon's margins have understandably slipped, but that should reverse as the company realizes efficiencies within in its system. The improvements will likely occur over a period of several quarters, and investors will be on the lookout for margin expansion to begin anew.
Amazon has been a highly successful technology stock over the years, with growth coming in fits and starts. The company has been investing heavily for future growth, but that's been a key component of Amazon's success, so watch for signs that this initiatives are beginning to pay off.