ii view: Amazon delivers and its shares soar

Over 150 million paid Prime members help Amazon’s market value back above $1 trillion. 

Fourth-quarter results to 31 December 2019

• Net sales up by 21% to $87.4 billion
• Operating income up 2.6% to $3.9 billion
• Diluted Earnings Per Share (EPS) up 7.1% to $6.47

Chief executive Jeff Bezos said: 

“Prime membership continues to get better for customers year after year. And customers are responding — more people joined Prime this quarter than ever before, and we now have over 150 million paid Prime members around the world. We’ve made Prime delivery faster — the number of items delivered to US customers with Prime’s free one-day and same-day delivery more than quadrupled this quarter compared to last year.”

ii round-up:

Online retailing giant Amazon.com (NASDAQ:AMZN) reported blow-away results in this latest quarterly and full-year update. 

Both sales and profits exceeded analyst forecasts while management guidance for the current first quarter period also surpassed estimates. 

Big investments made to expand one-day and same-day deliveries had helped its paying Prime membership increase from 100 million in April 2018 to over 150 million globally, fuelling the growth in sales and earnings. Amazon Music customers grew by nearly 50% year-over-year to an audience of more than 55 million.

Amazon shares surged by more than 10% in afterhours US trading, taking its value back over $1 trillion and leaving it in the company of fellow tech giants Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL). 

The online retailer plans to spend a further $1 billion on its deliver extension over the current first quarter period and the same again in the second quarter. 

Away from retail, its cloud and data storage business Amazon Web Services (AWS) posted a 34% increase in sales to $9.95 billion, marginally ahead of forecasts, but down on the 35% growth seen in the third quarter. Growth was also way below the 62% recently posted by Microsoft’s competing Azure cloud business. Amazon is disputing a US government defence contract recently won by Microsoft which it also bid for. 

ii view:

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is evidenced by phenomenal growth. The group’s AWS business also offers attractive growth potential. Microsoft’s recent US government defence win was worth around $10 billion over 10 years. 

For investors, a failure both to beat its September 2018 record high and for its stock market value to consistently exceed $1 trillion, might suggest that the best of its growth is now behind it. But a forward price/earnings (PE) ratio of over 85 implies that investors and analysts anticipate more growth to come. As with the other mighty US tech stocks, the debate about valuation is never far away. But Amazon is the retail market leader and streets ahead of the rest; it's why investors keep buying. The real test, however, will be how it copes with the next major economic slowdown.

Positives

• Dominant position in online retailing
• At 55 million users, Amazon is edging closer to Apple’s market share in music streaming
• The Amazon Web Services (AWS) business is now a major global player

Negatives

• The threat of increased regulation across many of its markets
• Management succession risk – who might replace current CEO and founder Jeff Bezos
• No current dividend payment

The average rating of stock market analysts:

Strong buy