Despite strong Q4 2018 results, Amazon’s stock price took a 5% hit during extended trading on Jan. 31 due to slowing growth, weak guidance for Q1 2019 and increased spending planned for the coming year, according to CNBC. The retailer also is facing a significant challenge in India due to a new law that will disrupt its current operating procedures in the country.
The retail giant reported a 20% net sales increase in its latest quarter, totaling $72.4 billion. However, this was the lowest increase since the 15% growth reported for Q1 2015. Revenue at Whole Foods rose approximately 6% over Q4 2017.
While its retail growth may not be as vigorous as it has been in the past, Amazon has plenty of other profit centers. Amazon Web Services (AWS) maintained a 45% growth rate, with $7.4 billion in revenue during Q4 2018, while revenue from the "Other" segment, which is dominated by Amazon’s advertising business, reached $3.4 billion.
“Amazon, being Amazon, has a diversified array of investments which should keep it in good stead regardless of slowing growth,” said Oweise Khazi, Senior Principal at Gartner L2 in an interview with Retail TouchPoints. “Key areas of focus would be its advertising business, which had a year-over-year growth of almost 97% in Q4, and improving revenue per Prime user. Subscription initiatives such as Prime Wardrobe and Prime Video saw significant investments in Q4 and should continue to do so in 2019. Lastly, let’s not forget that AWS is Amazon’s golden goose and is only going to boost the company’s momentum.”
Another of Amazon’s up-and-coming areas is voice: the Echo Dot was Amazon’s top-selling item across all products globally during the holiday season, according to Amazon CEO Jeff Bezos. Additionally, millions more Echo family devices were sold in 2018 compared to 2017. These devices, along with other Amazon-exclusive offerings, will be another key ingredient in Amazon’s future success.
“Amazon’s lightning growth was due to stabilize,” said Natalie Kotlyar, Partner at BDO. “The key to sustaining momentum for Amazon may lie in exclusivity, as they have already won on convenience and variety. Amazon can position itself for success in the near term through the added visibility brought by exclusive agreements.”
New Law Blocks Amazon’s Indian Business Practices
Amazon’s international sales grew 15% in Q4 2018, significantly slower than the 29% jump posted in Q4 2017. India may prove a particular challenge despite the retail giant’s investments in the country, thanks to a new law that may force the company to pull as many as 400,000 products from its virtual shelves, according to TechCrunch.
The new regulation bans exclusive sales, prevents retailers from selling products on platforms they count as investors and applies restrictions on discounts and cashback promotions. This hampers Amazon, which responded to a 2016 ruling that prevents it from owning inventory by offering items through entities jointly owned with local partners. Amazon is considered an investor under the new law, which will prevent the companies from continuing to work together directly.
"There is much uncertainty as to what the impact of the government rule change is going to have on the e-Commerce sector there," said Brian Olsavsky, CFO of Amazon on a call with analysts. "Our main issue and our main concern is trying to minimize the impact to our customers and sellers in India."
Stock Drop Likely To Be Short-Lived
Amazon also disappointed investors with its plans to increase spending on investments such as hiring and capital expenditures. The company also announced a Q1 2019 revenue guidance of $56 to $60 billion, slightly below the $60.8 billion consensus estimated by FactSet. While these factors contributed to the stock price drop, Khazi noted that Amazon’s emphasis on investments is business as usual, and he expects the stock to bounce back.
“Amazon as a company is known for operating under low profits and pumping revenue back into the enterprise,” said Khazi. “Stock prices fell almost immediately after the announcement that Amazon will increase investments in 2019, but should recover soon, and analysts are still confident in the stock. Amazon’s focus on higher margin categories such as AWS, its third-party marketplace and advertising should placate the impact of higher investments in 2019.”
Even with planned expenditures, Amazon as a whole is profitable: the company generated $3 billion in net income in Q4 2018, up 66% from last year. Additionally, the retailer finished the year with $232.9 billion in annual revenue, passing the $200 billion milestone for the first time.