Amazon (AMZN) reported a strong beat with its fourth quarter earnings. Net sales of $125.6 billion (+44% year over year) exceeded estimates of about $119.717 billion. Operating income increased to $6.9 billion, crushing estimates of $4.4435 billion, leading to an earnings per share number of $14.09 (+117% YoY) that smashed the $7.23 expectation.
Before we get deeper into the results and guidance, we want to call out that the company announced that founder Jeff Bezos will transition to the role of executive chairman in the third quarter of 2021. Taking over as CEO will be Andy Jassy, who is currently in charge of Amazon Web Services. A couple years ago, Jim Cramer had the opportunity to sit down with the brilliant Jassy in an interview you can re-watch here. Amazon will miss the leadership of an entrepreneurial icon like Bezos, but we have the upmost confidence in Jassy and this change in leadership. You can read more about Bezos' decision in his letter to Amazon employees at the link here.
As for guidance for the first quarter 2021, net sales are expected to be between $100 billion and $106 billion, representing YoY growth between 33% and 40%. This outlook is higher than current estimates of $95.78 billion. Amazon notes this guidance anticipates a favorable impact of approximately 300 basis points from foreign exchange rates. Operating income is expected to be between $3.0 billion and $6.5 billion, up from $4.0 billion YoY, but at a midpoint of $4.75 billion is below estimates of $5.9 billion. Amazon's guidance, however, assumes approximately $2.0 billion of Covid-19-related costs and that might make up some of the difference.
By geography, North America net sales were $75.346 billion (+40% YoY), exceeding expectations of $74.16 billion. Operating income was $2.946 billion (+55% YoY), a result that was far better than expectations of $1.689 billion.
International sales in the quarter were $37.467 billion (+57% YoY), a huge beat relative to estimates for $32.475 billion. Furthermore, operating income of $363 million was far better than expectations of a $468 million loss. Management attributed the acceleration in revenue growth partly to Covid-19-related government actions and lockdowns in the U.K and Europe, as well as the timing shift of Prime Day.
By segment, net sales at Online Stores, the heart of Amazon's e-commerce business, were $66.451 billion (+43% ex-FX) and topped estimates of $62.641 billion. The growth rate represented a strong acceleration from the third quarter, thanks to a strong holiday season led by shift in timing of Prime Day to the fourth quarter as well as a continuation of Covid-19 related demand trends that began when the pandemic first started. But with increased sales comes elevated worldwide shipping costs, which rose 67% YoY to $21.465 billion.
At Physical Stores (mostly Whole Foods) revenue was $4.022 billion (-7% YoY) in the quarter, roughly in line with the $4.074 billion consensus. Not much to add here, other than the orders that are placed online and get delivered to homes end up showing in the Online Stores.
At Amazon Web Services, revenue of $12.742 billion (+28% YoY) came in shy of the consensus estimates for $12.833 billion. At 28%, the YoY growth rate ticked lower from the 29% figure Amazon achieved in the previous two quarters. We would not get hung up on this because AWS' annual "re:Invent" conference was virtual and free this year. Usually the company records revenue from tickets and sales. On the conference call, director of investor relations, David Fildes, said AWS YoY revenue growth would have accelerated from the third quarter to the fourth, if not for this one-year exception. Furthermore, the growth rate does not discount the fact that AWS had many customer wins and new commitments and migrations in the quarter. Some of the more notable ones include JPMorgan Chase (JPM) , Itaú Unibanco, and Standard Chartered Bank within financial services; Metro-Goldwyn-Mayer (MGM), Thomson Reuters, and ViacomCBS (VIAC) in media and entertainment; Arm and Twitter (TWTR) in tech; Star Alliance (the world's largest airline alliance) in travel; Mercadolibre (MELI) in retail/e-commerce; Siemens Smart Infrastructure in power/utilities; and BMW in automotive. AWS' backlog sat at about $50 billion at the end of the year, an increase of about 68% YoY.
AWS Operating Income came in at $3.564 billion (+37% YoY), a slight miss against estimates for $3.752 billion. The operating margin was 28.0%, representing the second quarter in a row of contraction though the current level is still at a 1.9 percentage point expansion over this quarter last year's figure.
In Subscription Services, which include annual and monthly fees associated with Prime, audiobook, e-book, digital video, digital music, and more, revenues of $7.061 billion (+34% ex-FX) nicely exceeded estimates of $6.852 billion. The results here continue to show that Amazon's Prime delivery and growing video/music content offerings are excelling at driving membership. Of note, management said on the call that Prime sign ups were strong in the quarter and engagement was up with members shopping with greater frequency and across more categories and also expanding their usage of Prime's digital benefits like Prime Video, which in the fourth quarter had its strongest viewership for live sports globally. By increasing the value of the Prime membership, the product will become even more "sticky" with the consumer, the subscription's pricing power will be even stronger in the future. A price increase for Prime at some point down the road would be a positive event for the stock.
Third-Party Seller services includes commissions and any related fulfillment and shipping fees, and other third-party seller services. Sales were $27.327 billion (+54% YoY ex-FX) and were ahead of estimates for $26.333 billion. It's no surprise to see this business track higher alongside Online Stores as both benefit from increased e-commerce adoption, and this segment is a focus area as well because it runs at a higher margin than Online Stores.
Other sales, which mostly comes from the high-margin Advertising, came in at $7.952 billion (+64% YoY ex-FX) and was well ahead of the $7.244 billion consensus. Driving the acceleration in revenue growth this quarter was the recovery in advertising spend as well as the shift in timing of Prime Day. Management also highlighted efficiencies that they are adding to the advertising business like the application of deep learning to show more relevant sponsored ads, the improvement of relevance of ads, and also the adoption of video creative formats.
Overall, Amazon delivered a truly magnificent quarter that handily beat expectations thanks to strength across many different lines. The company remains one of the largest beneficiaries of the Covid-19 pandemic, but when you think about it on a deeper level you realize that Amazon's business is thriving from long-term shifts in consumer and business habits. Whether it be through the accelerated adoption of e-commerce, cloud transformations, or digital content, we continue to believe Amazon features one of the strongest growth stories in the market.
Shares of Amazon, however, are trading only $10 higher in after-hours trading, despite the much-better-than-expected results that beat even our loftiest expectations as the CEO transition news and the somewhat lighter-than-anticipated operating income guide are weighing on the stock. We would view weakness related to these latter two topics as a buying opportunity, because we expect a seamless transition (and Bezos is still with the company as an executive chairman, anyway) and management tends to be conservative with its outlook, but then delivers massive earnings beats as we have seen time and time again over the past several quarters.