Amazon (Amazon Stock Quote, Chart NASDAQ:AMZN) kept the train rolling with its latest quarterly earnings, but revenue growth for the e-commerce giant looks to be slowing. Is that sign of things to come for one of this century’s greatest growth stocks?
Quite possibly, according to portfolio manager Darren Sissons, who says the law of large numbers will catch up to Amazon one of these days.
Markets are reacting positively on Friday to Amazon’s first quarter of 2019, which featured a record profit of $3.6 billion and an operating profit of $4.4 billion, representing a 7.4 per cent margin, double the $3.8 per-cent from a year earlier. The company posted EPS of $7.09 per share versus analysts consensus estimate of $4.72 per share. (All figures in US dollars.)
The top line news was a little more muted, however, as revenue arrived on target with consensus at $59.7 billion, which represented a 16.9-per-cent increase compared to a year earlier. That growth rate was the slowest since early 2015. Management guidance for Q2 has sales growing between 13 and 20 per cent, saying that it anticipates an unfavourable impact of approximately 150 basis points from foreign exchange rates. The company projects Q2 operating income of between $2.6 and $3.6 billion, compared with $3.0 billion a year prior.
Sissons says Amazon’s multiple is large enough that investors should be wary about a long-term hold.
“We looked at Amazon last year and ran some numbers and the P/E was about 98x — effectively, that tells you that you have to wait 98 years to get your money back,” says Sissons, portfolio manager for Campbell Lee & Ross, to BNN Bloomberg on Thursday. “Ultimately, with any maturation process, as companies get large and they start to mature and people want to pay less and less for the earnings, you’re starting to run into the issue of the law of large numbers with Amazon.”
“How much bigger can it grow? If it grows 20 per cent, given its market cap, and you assume maybe a 50 per cent margin, how much market capitalization do they have to create? It’s substantial. You just run into the issue of how much more product can they push down the food chain,” he says.
Amazon’s AWS cloud service continues to grow, seeing a 41-per-cent increase in sales over the quarter, a slight pullback from the 49 per cent a year earlier, while the company’s advertising business grew by 34 per cent to $2.7 billion.
Sissons says that as Amazon grows, the prospect of a forced break-up of the company looms larger.
“If you look at what’s happened in the past when companies, particularly in the US, have gotten such dominant positions that they’ve been broken up, with the telcos being a very good example,” he says. “So, I think that we can see a situation where you get FAANG stocks that get so large in their economy and so dominant that regulators break them up or cause them to break up.”
“That’s a definite possibility, and it would be a great opportunity for a spinoff,” he says.
Disclosure: Cantech’s Nick Waddell owns shares of Amazon
We Hate Paywalls Too!
At Cantech Letter we prize independent journalism like you do. And we don't care for paywalls and popups and all that noise That's why we need your support. If you value getting your daily information from the experts, won't you help us? No donation is too small.