Personal Finance

With Sales Growth Slowing, Amazon Shows Its Age

A Prime Air jet

On the surface, Amazon's (NASDAQ: AMZN) earnings report looked like another strong quarter as the company beat both its own guidance and analyst estimates. Revenue increased 20% to $72.4 billion and earnings per share rose from an adjusted $2.16 a year ago to $6.04.

For most companies, 20% revenue growth would be worth celebrating, but for Amazon that pace marked its slowest top-line growth in more than three years. It's been more than a year since the Whole Foods acquisition, Prime membership is approaching a saturation point and the company is facing the law of large numbers. Amazon's days of blockbuster growth appear to be ending .

A Prime Air jet

Image source: Amazon.

Its e-commerce growth was actually worse than the 20% overall clip because that was juiced by 45% growth in Amazon Web Services (AWS), the company's cloud computing division.

Amazon's North American e-commerce revenue increased 18%, but that was barely faster than the 16.5% rate that Adobe Analytics said overall United States e-commerce revenue expanded in November and December. In other words, Amazon's online sales are essentially growing at the pace of the industry. That may be the clearest sign yet that increasing competition from retailers such as Walmart and Target are having an impact on Amazon's growth. Though their online sales are much smaller than Amazon's, both companies have been posting e-commerce revenue growth in recent quarters, increasing their market share. Neither Walmart nor Target has reported fourth-quarter results yet.

Amazon's direct sales were up just 13% in the quarter, slower than the overall e-commerce growth rate in the U.S. Ordinarily, that would be cause for concern, but Amazon is shifting focus to other businesses, downplaying the need for growth in its core e-commerce segment.

Changing the game

With direct sales slowing, Amazon is moving on to faster-growing high-margin businesses like its third-party marketplace, AWS, and advertising. Revenue from third-party seller services jumped 27% to $13.4 billion in the fourth quarter, and third-party sellers made up 52% of units sold on Amazon. AWS revenue increased 45% to $7.4 billion, driving its operating income up 61% to $2.1 billion. In its other segment, which primarily consists of advertising, revenue nearly doubled, increasing 97% to $3.4 billion as the company took advantage of high demand during the holiday season.

Amazon's subscription services revenue, led by Prime, also showed strong growth, up 25% to $3.9 billion, though that growth was boosted by the price increase for U.S. Prime subscribers that went into effect in May 2018.

The results in these other businesses show Amazon is reaping the benefits of the massive investments it made in its fulfillment network and the infrastructure needed to run AWS. Headcount increased just 14% during the year, a sign that its fulfillment center expansion has slowed significantly, which has helped to leverage its recent revenue growth. That's allowed the company to finally deliver significant profits on its bottom line.

The question for investors now is if Amazon can grow profits fast enough to make up for slowing revenue growth as the company forecast a sales increase of just 10%-18% in the current quarter. Meanwhile, the company's competitors continue to invest in faster shipping and their own e-commerce infrastructure, and many of Amazon's sellers would be happy to see another online marketplace challenge its supremacy.

Even with a fast-growing bottom line, the stock remains pricey and therefore vulnerable to any missed expectations. That explains why Amazon shares were down 5% in after-hours trading in spite of the better-than-expected fourth quarter numbers.

Find out why Amazonis one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Amazon is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of November 14, 2018

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Adobe Systems and Amazon. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More