With analysts projecting Amazoncom Inc (NASDAQ:AMZN) to record robust earnings growth of 41.19% annualised over the couple of years ahead, let’s stop and reflect on this encouraging sentiment. Those invested in the stock should contemplate the factors that are driving this growth, as the return realised by shareholders may look different in the future if underlying assumptions are not realised. To help investors get a top level understanding, I will try to evaluate Amazon.com’s margin behaviour to help recognise the underlying make-up of revenue and expenses that is responsible for driving future earnings expectations and what it means for AMZN’s returns relative to its competitors.Check out our latest analysis for Amazon.com
Understanding AMZN’s earnings with profit margin
In general, the value that accrues to equity holders is partly reliant on the ability of a company to convert sales revenue in to earnings. AMZN’s profit margin will help us understand the extent of this ability, as well as identify the forces behind earnings expectations.
Margin Calculation for AMZN
Profit Margin = Net Income ÷ Revenue
∴ Profit Margin = US$3.94b ÷ US$193.19b = 2.04%
Amazon.com’s margin has expanded in the past five years, as a result of average net income growth of 38.34% exceeding average revenue growth of 20.63%, which means that the previous increase in revenue has coincided with a larger portion falling to the bottom line. The current 2.04% margin seems to continue this movement, indicating that earnings growth has likely been driven through improved cost management alongside the benefits of revenue growth.
How is Amazon.com’s margin expected to behave in the future and what could it mean for shareholders?
Margins are expected to further the previous expansion, with annual revenue growth tipped at 18.25% and a forecasted 41.19% in annual net income growth. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Nonetheless, those watching the stock must know a expanding margin can hold various implications on the company’s performance depending on how it operates, which makes further research very important.
For AMZN, I’ve compiled three important aspects you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is AMZN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMZN is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of AMZN? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!