Amazon (NASDAQ: AMZN), an e-commerce behemoth, has been constantly grappling with supply chain disruptions throughout the past year. Its revenue, and even more so, earnings have struggled to keep up with the impressive track record in 2020 where the pandemic accelerated the transition to e-commerce. 

The latest earnings report gives us a glimpse at the company’s performance amidst the various headwinds.

1. Revenue

Net sales increased 9% to $137.4 billion in the fourth quarter, from $125.6 billion a year ago. This is in line with management’s guidance of 4% to 12% revenue growth.

While this slowdown in growth raises concerns about whether Amazon’s e-commerce tailwind is starting to fade away, it is still not unexpected. This is considering the elevated base in 2020 when e-commerce sales were soaring sky high amidst the lockdowns.

For the full year 2021, net sales increased 22% to $469.8 billion, compared with $386.1 billion in 2020. 

Growth was also broad-based as all three operating segments enjoyed an increase in sales. The sales in the North America and International region enjoyed an 18% and 22% growth respectively, thanks to increased unit sales on the e-commerce marketplaces.

On the downside, management expects its e-commerce sales growth rate to decelerate in Q1 2022 on a year-on-year basis.

Amazon Web Services (AWS), the cloud computing arm of Amazon, continues to outshine amidst supply chain disruptions and fulfilment network inefficiencies. Revenue from AWS grew by 37% in 2021.

2. Operating Income

Its operating income decreased to $3.5 billion in the fourth quarter, compared with $6.9 billion in the year-ago quarter. 

The bottom line was disappointing, to say the least. Though, management has warned of this through its guidance of between 0 to 3 billion of operating income for the quarter. 

For the full year of 2021, operating income did manage to eke out a slight growth (8.7%) to $24.9 billion, compared with operating income of $22.9 billion in 2020.

The sharp drop in operating income can be attributed to an increase in shipping and fulfilment costs as well as higher marketing expenses. 

While I am hopeful that the investments into Amazon’s fulfilment network will pave the way for greater business expansion in the future, I will also be keeping a close watch on how soon and how effectively is management able to resolve the present issues plaguing its fulfilment network. This, and also whether the fulfilment network inefficiencies are a temporary or structural problem, as there is no telling how long the pandemic will last. 

Once again, AWS continues to display impressive growth in its operating income. Its operating income surged from 13.5 billion to 18.5 billion in 2021, a 37% growth. 

Being a relatively higher-margin business, AWS still contributes the greatest portion of Amazon’s operating income.

3. Investments in Prime Membership

Amazon continues to invest in Prime, adding more benefits to its flagship membership subscription. 

Amazon has added more product selections available with fast, free, unlimited Prime shipping; more exclusive deals and discounts; and more high-quality digital entertainment.

Since 2018 in the U.S., the availability of Free Same-Day Delivery has expanded from 48 metropolitan areas to more than 90 while items available for Prime free shipping have increased by over 50%. 

With the continued expansion of Prime member benefits as well as the rise in wages and transportation costs, Amazon will increase the price of a Prime membership in the U.S., with the monthly fee going from $12.99 to $14.99, and the annual membership from $119 to $139. This is the first time Amazon has raised the price of Prime since 2018. 

4. Relentless pursuit of its omnichannel strategy 

Amazon Style, Amazon’s first-ever physical store for apparel, will open this year at The Americana at Brand, a top shopping destination in greater Los Angeles. 

Amazon Style is built around personalization and innovation. It uses machine learning algorithms to produce tailored recommendations in real-time as customers shop, making it easier than ever to discover new looks. At Amazon Style, customers will be able to have items sent to a fitting room with the tap of a button in the Amazon app and continue shopping from their fitting room without having to leave.

Also, the newly launched Starbucks Pickup with Amazon Go store allows customers to order a Starbucks beverage or food item for pickup through the Starbucks app and grab food items from the Amazon Go market, all in one convenient location without having to wait in line to pay. 

5. AWS Growth

AWS announced significant customer momentum, with new commitments and migrations from customers across many major industries.

In a landmark announcement for the financial services industry, Nasdaq shared its multi-year partnership to migrate its markets to AWS to become the world’s first fully enabled, cloud-based exchange.

Meta, the parent company of Facebook, Instagram, and WhatsApp, has also selected AWS as its long-term strategic cloud provider to accelerate artificial intelligence research and development.

6. Advertising services as a separate revenue segment

Brian Olsavsky, Chief Financial Officer of Amazon, has announced in its earnings report that it will be separating its advertising services revenue from other revenue. Amazon reported $9.7 billion in advertising revenue. That’s a 32% increase from the year-earlier period. This segment is likely to continue growing as vendors try to stand out from rivals on Amazon.

7. First Quarter 2022 Guidance

Sadly, the outlook for the first three months of 2022 doesn’t look any bit appealing at all for growth investors at the moment. Management is expecting net sales to be between $112.0 billion and $117.0 billion. That is a growth rate of 3% to 8% compared with the first quarter of 2021.

Its operating income is expected to be between $3.0 billion and $6.0 billion, compared with $8.9 billion in the first quarter of 2021. 

This guidance includes approximately $1.0 billion lower depreciation expense due to increases in the estimated useful lives of servers and networking equipment. That means even with the help of a lower depreciation expense, operating income still falls short of that in the previous year, by almost half.

It seems like it is going to be a while before fulfilment network inefficiencies and inflationary pressures finally subside. However, I am confident that this is a short term problem that Amazon will ultimately emerge stronger.

Conclusion

Despite the numerous short term headwinds facing this e-commerce behemoth, I believe that Amazon has and remains a solid long-term investment.

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