Amazon's first quarter net sales came in at $108.5bn, up 41% at constant exchange rates and ahead of market expectations. That reflects a 37.4% increase in product sales and 51.8% increase in service sales.
Rapid revenue growth and the shift to higher margin service sales meant profit after tax in the quarter more than tripled, from $2.5bn in 2020 to $8.1bn. That compares to market expectations of $5.0bn.
The shares rose 2.3% in pre-market trading.
2020 has been a transformative year for Amazon, and 2021 is shaping up to be similar. Despite billions in extra costs associated with the pandemic, Amazon has seen profits gallop ahead.
There are two main reasons for that.
The first is a huge surge in retail volumes in the US and abroad, meaning revenues are more than covering the fixed cost base. That's despite the fixed cost base itself growing at breakneck speed as the group continues to invest in fulfilment infrastructure. In fact, Amazon's international and US retail businesses together now generate more operating profits than the Amazon Web Services (AWS) cloud business - a landmark change from recent history.
The overall revenue mix is also shifting more towards services more generally. Total services, which includes things like Prime as well as AWS, accounted for 47% of Q1 revenues compared to 44.5% a year ago. That might sound small, but service revenues are far higher margin. We suspect the 70% or so growth in advertising revenues is higher margin still.
Put all that together and the result is stellar cash flows despite a huge uptick in capital expenditure. Amazon's modus operandi has always been to pour internally generated cash into new investment opportunities wherever possible - but at present it seems to be struggling to find homes for its embarrassment of riches.
This could be a golden age for the group. With high streets shut Amazon is 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 those tailwinds begin to unwind in the months ahead, and the golden age is followed by some dark years. But then even if growth halved it would still be formidable.
The spectacular growth opportunities in retail and cloud have not gone unnoticed. At the time of writing, the shares trade on a lofty 64.3 times expected earnings, lower than it has been, but still steep. That makes the share price particularly sensitive to disappointment.
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 only question is whether the price is right.
Amazon key facts
- Price/Earnings ratio: 64.3
- 10 year average Price/Earnings ratio: 127.1
- Prospective dividend yield (next 12 months): 0.0%
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.
First Quarter Results
North America saw sales rise 39.5% to $64.4bn, with operating profit of $3.5bn up 163.0%. In International sales rose 60.4% to $30.6bn with the region reporting an operating profit of $1.3bn compared to a $398m loss a year ago. AWS sales rose 32.1%to $13.5bn, with profits up 35.4% to $4.2bn.
Operating expenses across the company rose 39.4%, with particularly significant growth in Fulfilment and Cost of Sales. That includes bringing forward pay reviews for its US fulfilment staff, with raises of between 50 cents and $3 an hour reflecting a $1bn investment in employee wages. Quarterly capital expenditure rose 77.8% to $12.1bn.
The increase in capital investment meant free cash flow rose just 9% to $26.4bn. Net cash at the end of March stood at $41.4bn, down from $52.6bn a year ago.
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