Amazon Earnings Results Mean Hotter War With Google And Facebook In Digital Ad Space

Nothing wrong with 20% year over year revenue growth–unless, of course, you’re Amazon (AMZNWealth Strength IndexAAPL is Extremely Up and trending Up).

On Thursday, January 31, the company reported that revenue growth in the fourth quarter–the strongest retail quarter of the year–had at 20% come in at the high end of guidance but still weighed in at the slowest growth rate since the first quarter of 2015.

Retail sales slowed to 18% from 35% and online sales growth accelerated to 14% from 11%.

The company also gave soft guidance for the first quarter of 2019–just 14% revenue growth. Revenue will be $56 billion to $60 billion against current Wall Street projections for $61 billion.

Despite a big jump in operating income–up 78% to $3.8 billion–the shares fell 5.4% on Friday, February 1.

This quarter Amazon looked like two companies. There was the retail behemoth–online and bricks and mortar–with slowing revenue growth and rising costs. And there was the digital ad and cloud services giant where growth is faster and margins are higher.

For the quarter digital ad sales, Amazon’s fastest growing business, grew 97% year over year to $3.4 billion. (That was still a drop from 123% growth in the third quarter. Companywide revenue for 2018 was $233 billion and $72.4 billion for the quarter.))

There were disconcerting trends in the retail segment. Amazon’s efforts to expand its online footprint internationally would up generating slower growth and higher costs in India, a key future market. CEO Jeff Bezos has said he will spend $5 billion to build share in the Indian market. Losses from international operations climbed to $642 million in the quarter. International growth is essential to Amazon’s future in the online retail sector. The company will capture more than half of all online spending in the United States in 2018, according to EMarketer.

But the problems in the retail business weren’t limited to slower growth and higher costs in the international effort. Worldwide shipping costs climbed 23% in the quarter, a rate of increase higher than that for online sales as Amazon used shipping promotions to battle Wal-Mart (WMT) and Target (TGT) during the holiday shopping season. Amazon also saw membership revenue growth from Prime decelerate in an atmosphere were competitors more commonly offer free two day shipping. The growth of paid units–the number of individual items sold on Amazon also fell to 14% growth in the fourth quarter. A year ago the growth rate was 23%.

Which shifts more of the growth burden to the cloud segment, Amazon Web Services and to digital advertising. Growth is faster in these segments and operating margins higher–but, and this is the rub, these are still relatively small businesses compared the online retail operation. AWS revenue came in at $7.4 billion for the quarter (compared to company-wide revenue of $72.4 billion in the quarter.) Operating margins, though, were a very juicy 61%.. That compares to 2018 company-wide operating margins of 5.3%.

As you might imagine, one of the conclusions that Amazon has reached, looking at these numbers, is that it would make sense to grow its higher operating margin businesses as fast as it can. And that looks to be exactly what Amazon is doing. On the conference call Amazon said that sales and marketing spending at Amazon Web Services was a key contributor to the the 43% increase in marketing costs for the entire company. And Amazon said that capital spending at AWS would increase in 2019.

One takeaway from a decision by Amazon to growth revenue from web services and digital advertising as fast as possible is that competitors such as Microsoft (MSFTWealth Strength IndexAAPL is Extremely Up and trending Up) in the cloud services space, and Alphabet (GOOG) and Facebook (FBWealth Strength IndexAAPL is Extremely Up and trending Up) in the digital ad space can expect an even more aggressive Amazon in 2019.