With pandemic tailwinds fading, investors were expecting a slowdown from Amazon's (AMZN -0.16%) first-quarter report, but the falloff still seemed to surprise the market.
The stock plummeted after Amazon announced on Thursday that it missed bottom-line estimates and offered weak guidance for the second quarter. On Friday, shares were down 14% by closing bell. Beyond that, the numbers portray a company whose inexorable growth may be finally coming to an end. Amazon's revenue increased just 7% in the first quarter with much of that growth powered by its cloud computing division, Amazon Web Services (AWS). With nearly $500 billion in annual revenue, it makes sense that Amazon is struggling to deliver rapid revenue growth.
Outside of AWS, where revenue jumped 37% and profitability was robust, the results were dismal. Let's take a look at some of the most shocking numbers from the first quarter.
1. Product sales declined
Amazon breaks its revenue into two segments. Product sales -- the items sold on its website -- and services like AWS, Prime subscriptions, third-party seller services, and advertising.
Product sales in the quarter fell from $57.5 billion in the same quarter last year to $56.5 billion, indicating shopping on Amazon declined. The best explanation for that is that the pandemic tailwinds were strong enough to counteract any secular growth the business may have experienced, but it could also signal that the e-commerce business is reaching maturity. Similarly, first-party sales from its "online stores" declined 3% to $51.1 billion, though that's consistent with a shift to third-party sales.
It's almost certainly Amazon's first year-over-year decline in either of those categories. Most competitors haven't yet reported earnings, but Costco posted 12.2% comparable sales growth for the five weeks ended April 3 and 9.2% e-commerce sales growth, showing it's taking market share from Amazon.
2. Billions of losses in e-commerce
Amazon has three business segments: North America, International, and AWS. North America and international are primarily made up of e-commerce, but also include businesses like advertising that are only indirectly part of its online retail business.
In the first quarter, it reported an operating loss of nearly $3 billion in North America and international combined. North America revenue increased just 8%, and international revenue was down 6%, or flat when adjusting for currency exchange. Management acknowledged on the earnings call that it had excess capacity in both its fulfillment and transportation network and is also struggling with cost inflation and labor shortages. It should grow into that capacity over the coming years, but it also shows that the company may have overestimated its expansion.
The near-$3 billion in losses in one quarter is an anomaly, but Amazon has long struggled to deliver a profit in the international segment, indicating that e-commerce isn't a surefire profit machine.
3. A massive free cash flow loss
Over the last four quarters, Amazon reported a free cash flow loss of $29.3 billion when including repayments of finance leases. That's a staggering amount of cash to burn in one year and includes $63.9 billion in capital expenditures, which was used across AWS infrastructure, its fulfillment network, and transportation.
While those investments put Amazon in a position to absorb an increase in demand, the slowdown in growth in the first quarter and revenue guidance calling for just single-digit growth in the second quarter. On the bottom line, it expects to finish between a $1 billion operating loss and a $3 billion operating profit, well below the $7.7 billion in operating profit it reported in Q2 2021.
Time to sell?
It will take some time for the COVID noise to play out, but it seems doubtful that Amazon will return to its pre-pandemic growth rates. With annual revenue reaching nearly $500 billion, the company would have to find $100 billion in new revenue just to grow by 20%, and it faces a number of challenges including strengthened competition, inflation, labor shortages, a unionization push, and a potential recession.
Bulls will point to the strength in AWS, and some even argue that the cloud business can justify Amazon's entire valuation, but AWS is already at a revenue run rate of $75 billion, and its growth is likely to slow in the coming years.
The first-quarter report alone isn't enough to sell Amazon stock, but the results, along with Amazon's $1.3 trillion valuation, show that the tech stock's heady growth days of the last decade are likely over.