Amazon: 3Q Results Demonstrates Ability to Grow Profitably

Going into 3Q results, investors feared that Amazon's recent string of strong results had led to impossibly high expectations for the company to achieve. However, Amazon's recently reported 3Q results managed to exceed even these expectations, with results that were strong across the board.  


Retail Sales Growth Continues to Accelerate

Amazon reported revenue results that were above expectations and demonstrated accelerating trends from the prior quarters. NA retail grew +28% (+30% ex FX), while International grew +7% (+24% ex FX). This compared to expectations for trends to be similar to 2Q (NA +25%, International +3%). As expected (detailed in my prior 2Q post), Prime Day provided a boost to the quarter as Amazon noted significant growth in prime membership and unit sales. Analysts believe that results are being driven by higher mix of 3P sales and prime user growth. Internationally, analysts were also positive on the opportunity in India, where Amazon's efforts appear to be gaining traction.


Margin Improvement Also Accelerating

Amazon's profitability continued to improve, with profit coming in well above guidance and expectations. Consolidated operating income was $993 million, above the high end of guidance of  $100 to $650 million. Recall that Amazon management had noted an increased focus on efficiency and profitability back in 4Q14. Since that time, margin gains have improved at a faster rate each quarter. In 3Q15, operating margin gains increased 424 basis points compared to last quarter's 208 basis point increase.


AWS Continues to Shine

Amazon Web Services continues to outperform as well, with revenue growing 78% y/y and CSOI margins rising to 25%. The bull thesis here is that AWS will continue to grow sales driven by its low prices and first-mover advantage in the market. In turn, higher sales drives higher scale and higher margins. The impressive results in 3Q keep this thesis on track.


Overall Results Demonstrate Amazon is Able to Grow Profitably

All factors considered, analysts are most positive on Amazon's recent ability to grow profitably while continuing to invest in the company. While 2014 was a difficult year for the stock, the investments that the company made during that time appear to be paying off in the form of accelerating revenue and margin trends.