Don't Overlook These Metrics From Amazon's Fourth-Quarter Update

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For the most part, Amazon‘s (NASDAQ:AMZN) fourth-quarter update impressed investors. Revenue growth was strong, and earnings per share soared. But the company’s guidance for slower revenue growth in its first quarter and heavy investments for the full year worried some investors.

As they look over Amazon’s results for the important holiday period, here’s a look beyond the headline metrics. Given how far-reaching the e-commerce and cloud-computing company is, there’s a lot of information from the update for investors to consider.

These four metrics are important but could easily be overlooked:

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Image source: Getty Images.

1. Free cash flow

Sometimes it’s good to back away from the details in a financial update and take a 10,000-foot-view of one of the most important metrics of a business: its free cash flow. Defined as operating cash flow less capital expenditures, free cash flow captures the cold, hard cash that is the foundation of valuing any company.

Amazon is not only generating heady levels of free cash flow, but it’s also growing fast. With the help of its strong fourth quarter, Amazon’s free cash flow in 2018 was $19.4 billion, up 134% year over year versus $8.3 billion in 2017. 

2. Online stores revenue

Amazon’s online stores revenue, or revenue primarily generated from e-commerce sales (excluding online subscription services revenue), increased 14% year over year in constant currency. While this is slower than Amazon’s consolidated year-over-year revenue growth of 20%, it marks a meaningful acceleration from the company’s 10% constant-currency year-over-year growth in online stores revenue in Q3. 

3. AWS operating margin

Amazon’s cloud-computing business, Amazon Web Services (AWS), continues to be the company’s cash cow. Operating income from the segment surged from $1.4 billion in the fourth quarter of 2017 to $2.2 billion in the fourth quarter of 2018. While AWS’ 45% year-over-year revenue growth contributed to this big increase in segment operating income, the segment’s expanding operating margin helped meaningfully, too. AWS’ operating margin widened from 26.5% in the fourth quarter of 2017 to 29.3% in the fourth quarter of 2018.

4. Subscription services revenue

Finally, Amazon’s subscription services revenue, or revenue generated from annual and monthly fees related to the company’s Amazon Prime membership and its audiobook, video, e-book, music, and other non-AWS services, saw revenue rise 25% year over year in constant currency.

While this is strong relative to the company’s consolidated top-line growth, it’s a notable deceleration from the 52% growth the segment saw in the company’s third quarter of 2018. But after adjusting for an accounting change that hurt the segment’s revenue during the quarter, subscriptions revenue increased 34% year over year. 

Growth in the segments discussed in this article, along with strong performance from Amazon’s third-party seller services and “other” revenue, helped the company’s total fourth-quarter revenue rise 20% year over year to $72.4 billion. Earnings per share for the period were $6.04, up from $3.75 in the fourth quarter of 2017.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Sparks owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.