Amazon Q4 - Strong International Growth

When a company reports its results, we immediately look at four key pieces of information. Firstly, its reported profits in Dollars or Rands per share, relative to market expectations. Secondly, sales revenues relative to consensus. These two tell you right away whether we are dealing with a 'beat' or a 'miss'. Thirdly, we look at the tone of the management guidance for the year ahead. Is the outlook good, or are they guiding us lower? Finally, and most importantly of all - what is the share price reaction.

The fact that the market reaction is the most telling of all reveals an important truth: the market sets the price of shares and that's what counts in the end. As they say, talk is cheap but money pays the bills.

When Amazon reports its earnings, they can be hard to judge. The massive online retailer is one of the world's most valuable companies. It has done tremendously well as a listed company. However, it has not been profitable for much of that time, as a result of a conscious management decision by CEO and founder Jeff Bezos, to favour revenue grown over profitability.



Late last week Amazon reported fourth quarter profitability just above consensus forecasts, driven by strong sales at cloud-hosting Amazon Web Services (AWS), advertising, and operational efficiencies, but offset by rising marketing expenses, mostly from sales hiring. Notably, capital expenditure and investment in infrastructure re-accelerated to +19% year-on-year.

Amazon reported fourth-quarter revenue of $72.4 billion. Excluding its Whole Foods physical stores, that represents a slight cooling to (just) 23% growth year-on-year. Growth in the international business accelerated, especially in India. AWS contributed $7.4 billion in revenue in Q4, growing 46% compared to last year, even as profit margins in the division expanded. That's just amazing. Did I mention yet that Vestact is an AWS customer? Yes, we are. There, I did it again.

Guidance for the first quarter of 2019 was for revenue growth on an FX-neutral basis of about +20% and operating income of $2.3 to $3.3 billion compared to consensus of $3.0 billion. Amazon's guidance is pretty useless. Over the last eight quarters Amazon has exceeded the high-end of its operating income guidance seven times.

In reaction to all of the above, the stock price of Amazon slipped by 5.4% in Wall Street trading on Friday. While that sounds bad, remember that it had a strong month, rebounding from the selloff in the last part of 2018. It's trading now at around $1,626 per share. The all-time high is $2,050 per share, which it reached last September when the whole market was flying high.

We hold Amazon because we believe that online retailing is still in its infancy, and they are the global leader. Its digital hosting and subscription business has plenty of space to grow. Now is a good time to be accumulating Amazon shares.