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Amazon Is Striving for Earnings Growth

By Ishfaque Faruk – Feb 11, 2014 at 9:30AM

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Amazon is supremely positioned to grow from multiple avenues in the long run, and the company is now focused on ramping up its earnings. The recent sell-off after the earnings miss represents a great entry point to accumulate shares.

Amazon (AMZN -0.77%) is very well-positioned in the long run to grow in multiple sectors. The company is growing at twice the rate of overall e-commerce, and will continue to benefit from its immense scale -- that gives consumers broad selection, good pricing, and convenience.

The recent sell-off in Amazon shares is a good buying opportunity, as the company is now focused on growing its earnings and free cash flow.

Healthy growth
Amazon's Q4 2013 revenue increased 20% to $25.6 billion, and the company delivered an operating profit of $510 million, which points to an operating income margin of 2%, the highest for Amazon in the last 10 consecutive quarters. The company saw strong growth in free cash flow, which increased to $2 billion from only $395 million in 2012. 

The company continues to grow at almost twice the growth rate of e-commerce, which increased 11% during the holiday quarter, according to comScore. In addition, Amazon disclosed that it now has more than 20 million Prime members. Amazon can generate substantial revenue if the company can convert Amazon Prime trial customers into regular paying customers.

The company added seven fulfillment centers in 2013, and is raising prices on Prime. Both of these decisions will aid the company in reducing shipping costs as a percent of sales, which stood at 4.7% for the last two years. Amazon's ability to derive more subscription revenue will aid the company in reducing its net shipping costs and aid earnings growth. 

Amazon's global paid units increased 25% in the last quarter, but that was a decline from the last few quarters. The company now has more than 237 million at the end of 2013, a 19% increase from the 200 million customer accounts at year-end 2012. 

Third-party and web services will aid margins
Third-party sellers on Amazon's platform made up 39% of paid units in the holiday quarter. The company generates relatively higher margins from third-party sellers, which aids revenue growth (especially in the U.S.) and helps margins.

Amazon's same-store-sales grew 28% in December 2013, whereas its e-commerce counterpart, eBay (EBAY -0.42%), grew same-store sales only 11% during the same period, according to ChannelAdvisor.  But, since eBay doesn't sell its own merchandise like Amazon, eBay manages to grow earnings alongside revenue. eBay's top line grew 14% and its earnings per share grew 9% in full-year 2013.

In 2013, Amazon's North American business grew twice as fast as its international business. Revenue from North America grew 28% to $44.5 billion, whereas International revenues grew 14% to $29.9 billion. However, the international segment made up only 5.4% of Amazon segment operating income in the last year.

Amazon Web Services is adding newer services and features in an attempt to remain the leader in the cloud computing space. The company added more than 100 new services and now offers six Amazon Elastic Compute, dubbed Amazon EC2, cloud instances. This will enable the company to develop and gain new customer relationships. AWS is also launching an office in China, which should aid the company in gaining entry into the massive Chinese market.

The company doesn't break out revenue for AWS as a separate line item, but other revenue segments of Amazon grew 56% in 2013 to $3.94 billion. The company earns much higher margins from its web services business relative to its retail operations, and AWS represents great value for consumers thanks to hourly pricing for cloud computing solutions. 

However, Amazon still lags Apple (AAPL -1.96%) substantially in terms of tablet market share. Apple sold a record 26 million iPads in the last quarter and holds 34% of the tablet market share, according to IDC. On the other hand, Amazon shipped 5.8 million tablets in the holiday quarter, and holds almost 8% market share. But, Amazon makes most of its money by selling content from its ecosystem, and not on hardware, so tablet shipments will aid future media and content sales, which have a relatively higher margin. 

The bottom line
Amazon has been investing in building out infrastructure and growing its business, but now the company seems focused more on growing earnings and free cash flow. Last quarter, the company raised the threshold for free shipping, and is contemplating raising the subscription price of Amazon Prime in the near-term. Both of these decisions will aid the operating margins of the e-commerce giant. In addition, Amazon's margins will also benefit from the rapid growth of AWS.

The company will sustain high revenue growth for the next few years, and its business is getting more tailwind from connected devices and more e-commerce usage by consumers across the globe.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends, Apple, and eBay. The Motley Fool owns shares of, Apple, and eBay. 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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