Q1 2019 guidance – Slower growth
Let's focus on the facts: Amazon's revenue growth rate is obviously slowing down. Yet, for the moment, shareholders do not seem willing or eager to deal with this extremely important fact. Amazon, whose price is higher than the average price, suffers from its inability to post above-average growth of 20% of its revenues in the future.
It is not difficult to see why. Amazon has become so important that it is very difficult for it to generate $ 50 billion in additional revenue compared to $ 233 billion last year.
In the graph above, I've included Amazon's first quarter 2019 growth rate in the upper portion of its guided range. Thus, in decline, we have a 31% growth in 2018 compared to the previous year. Then, while Amazon was entering the last quarter of the year, its growth rate in the fourth quarter had slowed to stand at 20% over the same period of the year. former. Finally, we find that for the first quarter of 2019, its expected growth rate is now in the mid-to-high range of teens, which is certainly no longer at the height of a fast-growing company.
Significant Future Investment for 2019 Fiscal Year
Then, Amazon said during its call for results that 2016 and 2017 had been very investment-intensive years for Amazon, Amazon having invested heavily in its growth. And thanks to these few years of investments, this year 2018 Amazon has been able to enjoy and digest these two years of consecutive investments by not having to invest so aggressively in its activities.
This assertion can certainly be corroborated by the fact that in 2016, Amazon posted a GAAP operating margin of 3.1% and in 2017 a similar operating margin of 2.3%. But the operating margin of Amazon in 2018 jumped to 5.3%.
So, why is this a problem?
There is a very clear gap between the amount of Amazon's spending in the business and the amount of growth that is taking shape. In 2017, Amazon made a perfectly logical investment to align with the growth of its business with the acquisition of Whole Foods Market.
Why does it make sense? Because Whole Foods is a retailer. As a result, it is able to generate a lot of revenue but is not very profitable. As such, by acquiring Whole Foods, Amazon has not had to deploy much capital for this acquisition. As part of the transaction, Amazon has set aside less than $ 14 billion in 2017 for a company that has reported a business turnover slightly over $ 16 billion that year.
In other words, Amazon has been able to deploy capital that investors would be willing to use as a single acquisition in exchange for revenue. And these revenues are those that investors recognize not only as a recurring revenue stream, but reward them with a high multiple, given that Amazon is a high-growth disruptive company.
And best of all? The acquisition of Whole Foods by Amazon is not recognized in its income statement. As a result, this has no impact on Amazon's net profit, EPS figures. At the same time, Amazon's revenue is a very positive factor, the only financial indicator that really interests growing investors.
One last aspect of the confusion arises with regard to the evaluation of Amazon.
In the table above, I listed Walmart (WMT) and Microsoft (MSFT) as Amazon counterparts. How can this be? Well, that's part of the investor problem. The vast majority of Amazon's revenue comes from its retail activities. Yet about 60 percent of Amazon's consolidated operating profit comes from its much more profitable AWS segment.
Investors are largely rewarding their total revenue to Amazon when most of its revenue is unprofitable. So, should Amazon pay its price as a retailer? Or should Amazon be considered a software company, knowing that more than half of its financial results come from its software operations?
I would say that Amazon's price should be between a retailer and a recurring software company like Microsoft's. But as the chart shows, on a P / Sales basis, Amazon's price is higher than Walmart's. And on a P / Cash Flow from Operations basis, the price of Amazon is higher than that of Microsoft.
There is simply no rational argument about how Amazon can possibly be undervalued and offer investors a margin of safety. On the top line, Amazon's revenue growth is slowing. And as of 2019, its results should tighten, as Amazon continues to invest for growth. Yet for now, as the bull market continues and the song continues to play, investors are all too happy to get up and dance.
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