Amazon is slated to report its first-quarter 2022 results after the closing bell on Thursday, April 28.
Wall Street expects Q1 revenue to rise 7.2% year over year. Analysts also project earnings per share to drop 46%.
Latest Results
Amazon reported Q4 EPS of $27.75. Revenues grew 9% year-over-year to $137.4 billion, almost in line with the consensus estimate of $137.56 billion.
Profits rose to $14.3 billion, from $7.2 billion a year ago. Amazon said profits nearly doubled in the critical holiday period, as the company managed to control labor and supply costs better than expected and saw gains in its cloud-computing and advertising businesses.
The financial results were a surprise to some analysts who expected earnings to be more subdued as Amazon dealt with rising costs on a variety of fronts.
Amazon Q1 Guidance
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. This guidance anticipates an unfavorable impact of approximately 150 basis points from foreign exchange rates.
Operating income is expected to be between $3.0 billion and $6.0 billion, compared with $8.9 billion in first quarter of 2021. This guidance includes approximately $1.0 billion lower depreciation expense due to increases in the estimated useful lives of our servers and networking equipment beginning on January 1, 2022.
This guidance assumes, among other things, that no additional business acquisitions, restructurings, or legal settlements are concluded.
Here's what to watch in Amazon's upcoming report:
While Amazon doesn't provide guidance for earnings, it does so for operating income. Management expects first-quarter operating income to range from $3 billion to $6 billion, which represents a decline of 66% to 48% from the year-ago period.
Amazon sales may continue to be challenged on tougher prior-year comparisons, with 1Q results slowing to near the high end of guidance for a 3-8% increase.
For context, last big holiday quarter, Amazon's revenue increased 9% year over year to $137.4 billion, near the high end of the company's guidance range of $130 billion to $140 billion. By segment, sales in North America and Amazon Web Services rose 9% and 40%, respectively, while those in international edged down 1%.
Last quarter's net income was $14.3 billion, or $27.75 per share, up 97% year over year. This result demolished the analyst consensus estimate of $3.58 per share. But that's because the bottom line got a big boost from a pre-tax valuation gain of $11.8 billion from Amazon's common stock investment in electric vehicle maker Rivian Automotive, which held its initial public offering (IPO) in November.
Amazon Sales May Slow; Cloud, Advertising Intact
Easing two-year sales comparisons may accelerate the year-over-year growth rate in upcoming quarters. Covid-19 variants and rising costs for labor, transportation and freight are margin headwinds to the retail business, that get offset by strength in higher-margin advertising, subscription and cloud services.
Cloud growth is anticipated to be 36-37% in constant currency, which would be a modest deceleration from a strong 4Q, and don't expect any weakness in new signups due to economic and geopolitical concerns. The operating margin could be around 31%, adding over $5.5 billion in operating profit to the overall company figure.
Can Amazon's Q1 Earnings Be The Inflection Point?
Like other companies that import products, Amazon has been dealing with pandemic-driven global supply chain issues, which have increased costs. Its costs have also risen because of higher employee wages stemming at least in part from a tight labor market.
The company has been doing a good job controlling the impact on its results of these macroeconomic issues. Moreover, on last quarter's earnings call, CFO Brian Olsavsky said management expected supply chain issues to have less of an impact on first-quarter results relative to recent results.
It's clear that the market has been digesting Amazon's massive growth acceleration from the pandemic. But, investors should not consider it a "slow down" but rather a healthy normalization.
Amazon CEO Andy Jassy also shared meaningful insights in his first Annual Letter, Jassy emphasized:
This growth also created short-term logistics and cost challenges. Supply chains were disrupted in ways none of us had seen previously. As we were bringing this new capacity online, the labor market tightened considerably.
Combined with ocean, air, and trucking capacity becoming scarcer and more expensive, this created extra transportation and productivity costs. We hoped that the major impact from COVID-19 would recede as 2021 drew to a close, but then Omicron reared its head in December, which had worldwide ramifications, including impacting people's ability to work.
And then in late February, with Russia's invasion of Ukraine, fuel costs and inflation became bigger issues with which to contend. (Amazon's 2021 Letter to Shareholders)
This growth also created short-term logistics and cost challenges. Supply chains were disrupted in ways none of us had seen previously. As we were bringing this new capacity online, the labor market tightened considerably.
Nevertheless, the updated consensus estimates suggest that Amazon's revenue and profitability normalization could reach an inflection point in FQ1. Therefore, the Street remains optimistic about Amazon's ability to navigate these challenges. Moreover, we think it's credible that the Street has already priced in the expected weakness in Amazon's P&L for Q1.
Analyst Opinions
ClearBridge Investments Large Cap Growth Strategy has to say about Amazon.com, Inc. in its Q1 2022 investor letter:
"With Amazon’s capex build largely done in 2020 and 2021, we believe it is now set up to generate robust revenue growth and margin expansion in all three of its key segments: e-commerce, cloud (AWS) and advertising. Amazon rebounded off post-invasion lows on the strength we experienced in e-commerce."
Morgan Stanley remains confident of the company's outperformance through FY23. It added, "We are lowering FY22/23 EBIT by ~$5.6bn/$1.1bn (15%/2%). We still expect revenue acceleration and margin expansion (even through higher fuel costs) to drive outperformance."
However, BNP Paribas earned the ire of bullish Amazon holders as it issued Amazon stock's "first sell rating since 2020." It highlighted: "Amazon's capital spending is going to be much higher than the market expects, while profit margins will be hurt by inflation shocks. The stock has been underperforming big tech peers and we expect that to continue."