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Amazon’s Slowing Growth Indicates How Difficult, Expensive Expansion is in E-Commerce, Morgan Stanley Says

8:08 AM, Feb 1, 2019 — (AMZN) growth slowed in the fourth quarter, an indicator of how incremental expansion in the world of e-commerce is becoming more difficult and expensive, Morgan Stanley analysts said in a note to clients the day after the marketplace giant released its earnings report.

The company after the close of trading on Thursday reported earnings of $6.04 a share, up from $3.75 during the same quarter a year earlier and well ahead of consensus compiled by Capital IQ for $5.51 a share. Sales jumped to $72.4 billion, up from $60.5 billion last year and topping the Street view of $71.94 billion.

First-quarter sales, however, are pegged from $56 billion to $60 billion, up between 10% and 18% from the same quarter in 2018, but below expectations for $61 billion. Operating income is seen between $2.3 billion and $3.3 billion, Amazon said. Operating cash flow jumped by two-thirds from the previous year to $30.7 billion in the 12 months that ended on Dec. 31, the company said. Free cash flow rose to $19.4 billion versus $8.3 billion the previous year.

Morgan Stanley analysts including Brian Nowak and John Colantuoni said in their report that fourth-quarter revenue was about 1% higher than they expected while GAAP earnings was about 16% lower than their above-consensus estimate. First-quarter revenue guidance was 2% below Morgan Stanley’s expectations and the top end of earnings was 7% below the bank’s outlook.

“Looking at the drivers, profits were pressured by lower gross margin (discounting/deals and higher mix of device revenue) and incremental investment in AWS (Amazon Web Services) salespeople, which more than offset lower fulfillment and shipping costs,” the analysts said. “While first-quarter revenue was light and fourth-quarter deals/discounting speak to a competitive holiday space, the other sources of downside are essentially investment.”

Shares were down 4.3% in pre-bell trading.

Amazon will not stop investing and plans to spend on headcount, fulfillment capacity and data centers this year, Morgan Stanley said. A slower growing top line, however, with the investment pressure is going to weigh on near-term profitability. The bank lowered its 2019 and 2020 GAAP earnings before interest and taxes by 5% and 12%, respectively.

Prime subscriber growth also is slowing as the tailwinds from 2017 and 2018 have “lost some luster,” the analysts said.

“Amazon is already driving (about) 70% of every incremental dollar of growth within its core addressable US PCE,and (its) international business hasn’t been able to grow as quickly as hoped — in particular beyond UK/Germany/Japan,” Morgan Stanley said. “But this doesn’t change our view of Amazon’s ability to drive higher long-term gross profit and EPS growth with the key being (the company’s) ability to scale and gain traction in new US categories (including grocery), countries (Western Europe, India, ASEAN) and business lines (more advertising, logistics and healthcare).”

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