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Why Investors Are Going Bananas Over Amazon's Holiday Results

Fourth-quarter results were ho-hum, until you look at some specific areas of significant growth.

Asa Mathat
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

To an outsider, Amazon’s fourth-quarter results seemed pretty ho-hum, if not disappointing. A smaller profit than a year earlier. Slightly weak on revenue. And a worse-than-expected outlook for the first quarter.

But instead of punishing Amazon, investors have pushed the stock up 11 percent since the close of the stock market on Thursday.

What gives?

The easiest explanation is that analysts had been expecting Amazon’s earnings per share to come in at 17 cents, and Amazon blew that number away with 45 cents.

But there’s a lot more going on beneath those numbers, as some analysts noted after the call and in research notes this morning.

For one thing, analysts loved that Amazon’s North American revenue in its electronics and general merchandise category grew 27 percent in the quarter, well ahead of RBC Capital’s estimate of 22 percent. This category includes apparel and consumer staples — things like deodorant and soap and diapers — and generally includes all the stuff Amazon Prime members would be ordering on a frequent basis.

So why such fast-paced growth? RBC Capital’s Mark Mahaney previously told Re/code that any surprising growth in this category could be a signal that the investments Amazon is making to get goods to customers faster — adding perks to Amazon Prime and introducing same-day delivery in a bunch of cities — is resulting in customers ordering more from Amazon than they did in the past. In short, some see it as a sign that Amazon’s focus on getting stuff to people as quickly as possible does lead to more purchases. That’s big.

Analysts are also enthusiastic about Amazon’s gross profit and operating margin trends. Gross margins increased 3 percentage points in the quarter to 29.5 percent and the company’s operating margin of 3.5 percent — while tiny for many companies — far exceeded analysts’ expectations of 2.2 percent.

North America’s operating margin of 5.4 percent — the best in three years — was a positive surprise, too. Analysts like Mahaney and Suntrust’s Robert Peck think we may be seeing a turning point where Amazon’s aggressive warehouse buildout is finally setting the company up for margin growth going forward.

Investors and analysts also applauded the news that Amazon will begin breaking out results for its AWS unit. AWS sells cloud services to Web companies, including Netflix and a host of popular startups. AWS results have previously been lumped into Amazon’s “Other” category, along with advertising. This category posted the largest growth by far of any Amazon category in the fourth quarter at 43 percent.

Lastly, analysts took two vague data points as a positive sign. While Amazon didn’t disclose specific Prime membership numbers as I had hoped, the company did say membership grew 53 percent in the last year on a base of tens of millions of subscribers.

Amazon execs also said, in their own special version of corporate speak, that the company may be focusing more closely on cutting certain unspecified expenses than it has in the past.

One exec spoke of “driving fixed expense and variable expense productivity” and mentioned “other efficiency projects.” Mmmm, efficiency projects.

Correction: The story was updated to show the company’s gross margins had increased by 3 percentage points, not of by 3 percent.

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