Amazon Chugs Along in Q4, but Tepid Forecast Weighs on Stock [AMZN]

Core profit centers continue to surge, as Q1 guidance and accounting issues weigh on results.

On Thursday afternoon, Amazon reported mixed year-end earnings. The stock seesawed after hours, ultimately settling down around -5%.
The 1-Minute Takeaway:
Headline performance was mixed
Revenue and profits both grew robustly, but management forecasted a slower start to 2019 than we think many investors expected (driven partially by currency fluctuations)
Cloud business continues to defy gravity
Core profit center AWS (Amazon's cloud computing business) ended the year ahead of our expectations, recording yet another quarter of >40% year-over-year revenue growth. AWS profits grew even faster, up a whopping +61% vs. last year
Meanwhile, the core retail business hummed along nicely in-line with expectations
"Other" line item becoming increasingly less "other-able"
We felt one of the most notable aspects of the quarter was performance in "other" revenues, which we believe largely represents advertising revenues
Consistent with its strong performance over the last several quarters, the segment booked annual growth of nearly +100%
Though it's currently less than 10% the size of Amazon's retail business, we see the advertising business becoming increasingly important, and in its current state vaguely reminiscent of AWS in 2013
That is, while currently small relative to other segments, we think it's growing rapidly, bears structural advantages (Amazon knows virtually everything about what we buy and what to advertise to us better than any other company), and has a margin profile multiples more profitable than any other existing business within Amazon
Guidance and one-off accounting issues muddy the waters
The greatest concern for the quarter appeared to be the weak revenue forecast, which implied comparatively tepid growth in early 2019. There was no indication on the call that this represented a structural shift in Amazon's underlying competitive positioning
We believe other one-off issues complicated the story, like merger timing issues impacting Whole Foods growth rates, and accounting reclassifications impacting subscription revenue comparisons
Ultimately, we were pleased with Amazon's performance in the quarter, notwithstanding the accounting complications and tepid Q1 guidance. Be sure to keep an eye out on in our app for further dives into its young but increasingly important advertising business.
Jan. 31st, 2019
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