Cramer's Investing Club: Amazon's cloud-led earnings only give glimpse of its true potential

Published Thu, Feb 3 20229:27 PM EST

Investing Club holding Amazon (AMZN) reported mixed fourth-quarter results after the closing bell Thursday. Despite a slight miss on the top line, this report was far better than many had feared, and the stock catapulted roughly 14% higher in after-hours trading. Bottom line All told, Amazon reported a strong quarter. While fourth-quarter revenues missed the mark, operating income came in well above expectations, despite more than $4 billion in costs. These were related to lost productivity, disruptions in operations and inflationary pressures attributable to a tight labor market, the raging Covid Omicron variant and the need to leverage third-party carriers to support its fulfillment network. The operating profit was carried entirely by Amazon Web Services (AWS), which is now an incredible $71 billion run rate business with a 30% operating margin growing at 40% YoY. In fact, North America and International — two segments that represented a combined 87% of trailing 12-month revenues — actually reported losses this quarter. Just imagine the potential earnings power Amazon can generate once the company starts to digest ongoing investments in its U.S. logistics network and international expansion. Companywide results Consolidated sales of $137.4 billion, up 9% year-over-year, were just short of expectations of $138.12 billion. Diluted earnings came in at $27.75 per share, including a pretax valuation gain to net income of $11.8 billion, attributable to Amazon's Rivian Automotive stake. A Refinitiv analysis stripping out one-time items puts adjusted earnings at $5.80 per share. That compares to the Refinitiv consensus estimate of $3.57. If we take a look at operating profit, Amazon reported operating income of $3.46 billion, well ahead of the $2.55 billion the Street was looking for. Jumping over to cash flow, on a trailing 12-month basis, Amazon reported operating cash flow of $46.3 billion, down 30% year-over-year, and a free cash outflow of $9.1 billion. This compares with full-year expectations of $61.837 billion operating cash flow and $10.525 billion free cash inflow, respectively. While Amazon notes in its annual report that the company's "financial focus is on long-term sustainable growth in free cash flows," the outflows this past year do not concern us. We believe Amazon will never sacrifice longer-term growth investments for shorter-term profits. Given the accelerated adoption and incredible demand we have seen for cloud computing and online shopping since the start of the Covid pandemic, we believe they are right to be investing aggressively — both on the cloud front and on the logistics front, where Amazon is building out additional capacity to both handle increased volume and get the goods to customers faster. Last but certainly not least, we finally got that U.S. Prime subscription price hike we've been looking for, with management planning to increase the monthly cost of a membership from $12.99 to $14.99 and annual cost from $119 to $139. Given the slew of added benefits members now get compared to 2018 (when Amazon last raised the price of a Prime subscription), including three times as many original shows, Thursday Night Football and a significantly improved logistics network — we don't think the increase will result in any increase in churn. Assuming about 150 million members in the U.S., that price increase amounts to roughly $3 billion in additional recurring revenue going forward. Guidance Looking ahead to the first quarter, management expects sales to be between $112.0 billion to $117.0 billion, representing year-over-year growth of 3% to 8%. At the $114.5 billion midpoint, this guide is short versus the $120.96 billion the Street was looking for. Operating income is expected to be between $3 billion and $6 billion, also short versus the $6.475 billion the street was looking for. The operating guidance also includes a $1 billion benefit from a "lower depreciation expense due to increases in the estimated useful lives of our servers and networking equipment beginning on January 1, 2022." While this may at first seem like accounting change made simply to benefit profit margins, it reflects a real effort to reduce real costs. By optimizing the software to run more efficiently on the hardware, the team has extended the useful life of hardware for both assets used internally and to support AWS customers. Geographic fourth-quarter sales results Amazon generated North America sales of $82.36 billion, up 9% year-over-year, exceeding the $81 billion consensus. Despite the topline growth, aggressive investments in growth resulted in an operating loss for the region of $206 million, though that was better than the $635 million loss the Street was expecting. Internationally, Amazon generated sales of $37.272 billion, missing expectations of $39.769 billion. Despite the miss, operating losses of $1.627 billion were less than the $1.7 billion loss the Street was expecting. Segment Sales Results (growth rates on an FX-neutral basis) Online Stores: $66.075 billion (+1% YoY) vs. $65.989 billion expected Physical Stores: $4.688 billion (+16% YoY) vs. $4.384 billion expected Third-Party Seller Services: $30.32 billion (+12% YoY) vs. $31.0 billion expected Subscription Services: $8.123 billion (+16% YoY) vs. $8.403 billion expected Amazon Web Services: $17.78 billion (+40%) vs. $17.479 billion expected Advertising Services: $9.716 billion (+33% YoY) Other: $710 million (+19% YoY) Regarding the Advertising and Other results, we want to call out that this is the first time that Amazon has broken out its advertising results. As a result, we do not have a consensus expectations number. However, the Street was looking for a combined result of $10.419 billion, which signals to us that advertising was largely in line with expectations Regarding AWS, on the call, management called out that the platform added more revenue this quarter than any in its history. As for profitability, AWS operating income came in at $5.293 billion in fourth quarter, outpacing expectations of $4.933 billion as the operating margin expanded to about 29.8%, a roughly 180bps increase versus the year ago period. (Jim Cramer's Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A worker sorts out parcels in the outbound dock at the Amazon fulfillment center in Eastvale, California, on Aug. 31, 2021.

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