Amazon (NASDAQ:AMZN) stock was exploding higher by more than 11% Thursday after the market close, as the online retail king crushed earnings forecasts for the fourth quarter of 2014. Let's take a look at the latest report from Amazon and what it could mean for investors going forward.
Healthy top line
Total sales during the fourth quarter increased 15%, to $29.33 billion, versus $25.59 billion in the fourth quarter of 2013. Excluding the negative impact from foreign currency fluctuations, net sales grew 18% year over year. Amazon's own guidance was for revenues to be in the range of $27.3 billion to $30.3 billion, so sales came in near the top-end of the company's guidance.
Wall Street analysts were, on average, forecasting $29.67 billion in sales for the quarter, so the number was slightly below forecasts. Still, considering that currency headwinds were a big drag on sales during the quarter, Amazon continued delivering remarkably strong growth figures for a company of its size.
Beating on margins and profits
Amazon is actively investing for growth in different areas such as building its distribution network, digital content, and cloud-computing capabilities. This has negative implications when it comes to costs and expenses.
The fourth quarter was no exception at all. Fulfillment costs increased 17% year over year, to $3.4 billion, while technology and content expenses jumped by a whopping 42%, to $2.6 billion. However, Amazon still managed to deliver much-better-than-expected earnings, and Wall Street was taken by surprise by the company's improving profitability.
Operating income was $591 million in the fourth quarter. Management was expecting operating results to be in the range of an operating loss of $570 million and an operating gain of $430 million, so operating profits came in considerably above Amazon's own guidance.
Earnings per share were $0.45 during the quarter, crushing forecasts from Wall Street, as analysts were on average expecting $0.17 per share.
On a forward-looking basis, management is expecting sales for the first quarter of 2015 to be in the range of $20.9 billion to $22.9 billion, an annual increase of 6% to 16%. Operating result is expected to be between a $450 million operating loss and a $50 million operating gain, compared to an operating gain of $146 million in the same quarter last year.
Amazon's forward guidance is remarkably wide, so it doesn't offer much in terms of precision. Besides, the company has just delivered operating profits considerably above it's own guidance, so investors should probably take these estimates with a grain of salt.
What really matters
Amazon is a particularly dynamic and innovative company prioritizing long-term growth over short-term profitability. For this reason, it's important to look beyond the headline numbers when evaluating the health of the business.
Cash flows can be a much more adequate measure than earnings for a company like Amazon, and operating cash flows grew by a strong 25% year over year, to $6.84 billion. The company is generating considerable sums of cold, hard cash from running the business, and this is a big positive for investors in Amazon stock.
Because of heavy capital expenditures, free cash flows declined from $2.03 billion to $1.95 billion. Investing for growth can be expensive, and Amazon is not precisely timid when it comes to putting its capital to work in all kinds of initiatives.
One of the biggest positives from the report is that Prime membership is exploding higher in spite of the recent price increase. In the words of CEO Jeff Bezos:
When we raised the price of Prime membership last year, we were confident that customers would continue to find it the best bargain in the history of shopping. The data is in and customers agree -- on a base of tens of millions, worldwide paid membership grew 53% last year -- 50% in the U.S. and even a bit faster outside the U.S.
Amazon Prime is crucial when it comes to building customer loyalty and consolidating Amazon's leadership position in online retail, so booming membership numbers are a major plus for investors. Wall Street tends to put too much attention on earnings-per-share numbers, but variables such cash flows and Prime membership figures can be much more important from a long-term point of view.
This time, Amazon delivered rock-solid performance on both fronts, so things are looking well for investors in the company. After several consecutive quarters of negative reactions to earnings, Amazon bulls are having their revenge, and it's a well-deserved one.