Amazon reported fourth quarter net sales of $137.4bn, up 10% ignoring the effect of exchange rates. That was slightly behind analyst expectations. Growth reflected a strong performance from Amazon's Cloud business, Amazon Web Services.
Increased investment meant operating profit almost halved to $3.5bn. Andy Jassy, CEO said ''As expected over the holidays, we saw higher costs driven by labour supply shortages and inflationary pressures, and these issues persisted into the first quarter due to Omicron''.
The shares rose 14.2% following the announcement.
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Our view
The market had a jolly reaction to Amazon's final quarter results. And while progress in Advertising and Amazon Web Services can't be knocked, we're inclined to be a bit more measured.
Rising operating costs are outpacing revenue - reflecting increased investment in fulfilment capacity, higher wages and some effects from supply chain disruption. Some of that cost may be temporary, but a lot will linger.
An unexpected reversal in margins is never welcome. But Amazon has never been overly focussed on the bottom line.
We're happy to give newly installed CEO Andy Jassy the benefit of the doubt for now. The group has a sizeable cash pile on hand to fund investment and newer products are still showing very steady growth. The relatively new advertising proposition grew a third year-on-year. We also take comfort from the fact AWS is already showing rapid and profitable growth following investment earlier in the pandemic.
That's part of a broader shift in the overall revenue mix towards services. Total services, which includes things like Prime as well as AWS, accounted for around half of revenues last year. These should be far higher margin, although you wouldn't know it from the way profits are going.
Amazon's approach has always been to pour internally generated cash into new investment opportunities wherever possible. That's more important than ever now, because we suspect the US retail business is increasingly running up against the law of large numbers. When you're only selling $1,000 of product a year, boosting sales by 40% is relatively easy. When your annualised sales reach $470bn, finding an extra $160bn of sales is pretty difficult.
That could be one reason we're approaching the end of Amazon's golden age. With high streets shut Amazon has been a natural home for consumers' spare cash, AWS services remote working, which has suddenly become the norm, and tech wizardry is all the more useful when we can't see friends and family in person. It's possible we're starting to see those tailwinds unwind - making growth more of a challenge in the years ahead. If costs consistency climb too that may make investors jumpy - especially given the stock's valuation.
Amazon is a veritable Pandora's box of excellent businesses. Conventional retailers are going to have to deliver some dramatic changes to compete with the uncontested king of e-commerce going forwards, while cloud computing provides long term opportunities to service the remote working and data revolutions. The big question over the next 12 months is whether it can capitalise on those opportunities at a reasonable cost.
Amazon key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Forth Quarter Results
North American sales rose 9% to $82.4bn, but increased investment meant operating profit swung to a $206m loss from profits of $2.9bn the previous year. International reported net sales growth of 3%, reaching $37.3bn. Operating profit fell dramatically to a loss of $1.6bn. Amazon Web Services (AWS) had a more positive quarter, with sales rising 40% to $17.8bn, profits rose 46% to $5.3bn.
Total operating costs climbed to $134bn from $118.7bn, including a 21.5% increase in fulfilment expenses.
Capital expenditures rose 27.7% to $18.9bn. On a trailing twelve month basis, free cash flow fell to a $9.1bn outflow, compared to a $31.0bn inflow at the start of 2021.
Next quarter, Amazon said ''net sales are expected to be between $112.0 billion and $117.0 billion, or to grow between 3% and 8% compared with first quarter 2021''. Operating income is expected to be between $3.0 - $6.0bn, compared with $8.9 billion in first quarter 2021.
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