Jeff Bezos led Amazon.com (AMZN, Financial) came out with its fiscal 2014 fourth quarter and full year numbers on January 29, and I, personally, am confused whether to celebrate the green quarterly bottom-line figure or be worried about the massive 188% drop in full year net income, resulting in a loss of $241 million. (Note: Speaking mathematically, percentage fall between a positive and a negative figure can’t be expressed, yet, I have calculated the same to highlight the significance of the income drop.) Even if I decide to focus on the $214 million profit for the fourth quarter, I can’t help but notice it dropped by 10.5% year on year. And this is why I am confused why Amazon stock jumped 13.7% the next day, and currently is trading at $374.28, much close to its 52-week high of $383.11
Source: Yahoo Finance
Key numbers at a glance
For the quarter ended December 31, Amazon reported net sales of $29.33 billion, up 14.6% from prior year period’s $25.59 billion. The rise was even better at 18% absent the unfavorable impact of foreign exchange rates. Sadly, the healthy top-line growth didn’t translate into a bottom-line growth. The retailer booked profits alright, but the figure dropped by more than 10%. EPS also took a beating and came to $0.45, down from prior year period’s $0.51.
For the full year 2014, Amazon’s net sales came to $88.99 billion, up 19.5% from 2013, and up 20% absent the foreign exchange rate impact. This was the only growth that the company recorded for the year. Its operating margin was down by more than 76% and net income dropped by an astonishing 188%. Automatically the heat was felt in the earnings per share which came to a negative $0.52, compared with last year’s positive $0.59.
The following table provides a detailed summary of the numbers of the quarter.
Data taken from Amazon 4Q’14 Press Release, Table by author
Analysts and industry experts are excited about the fourth quarter profit and the stock’s upside potential, and that’s clearly getting reflected in the stock price movement. So. What are we missing? Let’s take a look at that.
What’s driving the stock up?
To begin with, the e-retailer’s fourth quarter profit dropped by 10.5%, but this was much less than the 18% drop anticipated by the street. This turned out to be one of the factors boosting the stock price. Next, the profit of $214 million came as a breath of fresh air since this was the second time in 2014 when the company reported a bottom-line that was in the green, and this was highest profit among 2014 quarters. The following table shows Amazon’s quarterly performance during the year.
So, looking at things from this angle, the fourth quarter profit was definitely a motivating factor as the come out of its largest quarterly loss, resulting in an effective improvement of 155% sequentially.
Again, Amazon’s earnings weren’t actually that bad, and rather they were pulled back by the unfavorable currency fluctuations. Tom Szkuktak, Amazon CFO and Senior VP, said during the earnings call, “Our results are inherently unpredictable and may be materially affected by many factors, including a high level of uncertainty surrounding exchange rate fluctuations”. This is what happened during the year in focus also. Without the negative impact of currency fluctuations worth $636 million, Amazon’s full year net income surely would have been positive. Bluntly calculating, it could have recorded profit of $395 million ($636 million - $241 million loss).
Coming to other factors, at the end of the year Amazon’s cash and marketable securities increased $4.97 billion annually to $17.42 billion. Again, one can’t overlook the amazing free cash flow worth $1.95 billion that Amazon has. Apart from these, during the quarter
- EGM (Electronics and General Merchandise) revenue improved by 21% and reached $20.64 billion and worldwide EGM increased to 70% of worldwide sales, up from 67%
- Worldwide active customer accounts were approximately 270 million
- Worldwide paid Prime members increased 53% year-over-year
- Worldwide active AWS (Amazon Web Services) customers exceeded one million
For Amazon, the Prime members are crucial since, as per Amazon’s observation, the Prime members are buying more, and thus increase in the membership base is a great news for the e-commerce major. But, for the company, the biggest win was probably the year over year 90% usage growth for AWS. All these factors came together to boost demand for the stock. The annual loss and the drop in quarter’s profit was outweighed by the huge growth numbers posted by the company related to the fundamental business.
