The Market Ticker
Commentary on The Capital Markets- Category [Earnings]
2017-10-26 16:18 by Karl Denninger
in Earnings , 444 references
[Comments enabled]  

Gotta read the actual report folks.


  • Depreciation was up 38% comparable quarter (!)
  • Net income was less than one quarter of last year.
  • Accounts payable have more than doubled.
  • Property acquired under leases on capital lease are up nearly double and on build-to-suit has roughly tripled!
  • Product sales are up 22%.  Cost of fulfillment is up 33% or at 150% of rate of increase in sales (!!!)
  • AWS margin last year this quarter was 33%.  This year it was 29%.  MARGIN CONTINUES TO BE HIT.
  • International sales growth is collapsing; it was up 30% last year, this year up 17%.

Oh, and AWS is only up 1% in terms of sales mix (from 10% last year to 11% this year.)

So much for AWS taking over the world.

Incidentally the story was that AWS was going to continue to ramp as a percentage of sales and thus it would all be ok.  Unfortunately that not only didn't happen fulfillment costs are going up 50% faster than product sales, which is utterly destroying operating margin on a consolidated basis.  Ex AWS they would have lost a crazy amount of money and with margin coming in on AWS, even a bit, an effective zero increase in percentage of sales from AWS and fulfillment costs continuing to go up faster than sales the two lines of sales and costs are going to converge and on that trajectory the firm will begin posting ever-larger losses.

That's math folks.

Of course nobody cares and you should buy the stock with both hands, on margin, to your maximum right now.  (Yes, that's sarcasm; the trailing P/E is now almost 250 and forward P/E is around 120.  P/E/G (5 year) is nearly five.)  Oh, and of course the company still has a margin of less than a grocery store; about 1.3%.

I note that exactly nobody commenting on the report has said one word about any of the above points, and yet the International sales growth collapse is monstrous, never mind that AWS was supposed to continue to advance rapidly to be a much larger piece of the total operation and that simply did not happen; it was only up one percent from last year.

Again, the entire premise of Amazon being able to 'dial-a-profit' whenever it wants to is that AWS was going to continue to accelerate as a percentage of the whole.  That's because when you have something with a 30% operating margin you can bury quite a lot of negative operating margin in the noise.

To keep doing that when physical fulfillment costs keep growing 50% faster than revenues do you had damn well better keep adding to the sales percentage of the 30% margin component as a piece of the whole if you expect to be able to put up any sort of consolidated black number on a forward basis. 

The fact is that Amazon is not doing so.

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