Shares of Amazon.com, Inc. (NASDAQ:AMZN) got hammered on Friday, falling about 3% after the e-commerce giant reported a huge bottom-line miss in its second quarter earnings result after the market close Thursday. But selling AMZN stock, which I expect to rise to $1,200 by year’s end, would be a foolish mistake.
AMZN CEO Jeff Bezos has built his company and his wealth by embracing risk. Those “risks” — if you chose to describe them as such — have been more like investments and have cost a lot of money. Given that Bezos rose briefly to become the world’s richest person on Thursday, those investments have paid off.
So why would he suddenly shift from his “if we build it, they will come” strategy now? AMZN is building for the next decade. To that end, the company’s second-quarter earnings results and third-quarter guidance — though to the dismay of investors — is secondary.
In the three months that ended June, Amazon reported net income of $197 million, or 40 cents per share, on revenue of $38 billion. The bottom-line number comes out to a year-over-year drop of 77%; the revenue number grew 25% year over year. Wall Street expected AMZN to report earnings of $1.41 per share on $37.2 billion in revenue. The company’s spending (investments) cut into its profit. Fulfillment costs — what it spends to pull-and-pack customers’ orders on its e-commerce platform — climbed 33%, while spending on technology and content grew 43%.
“Our teams remain heads-down and focused on customers,” Bezos said in a statement. “It’s energizing to invent on behalf of customers, and we continue to see many high-quality opportunities to invest.”
Betting on The Future
Some of those investments include the recently launched Echo Show, which features calling and messaging capabilities via Alexa Echo devices. Also included in the list is Inside Edge — Amazon’s first Indian Original series — on Prime Video. There’s the Amazon Channels launched in both the U.K. and Germany. Oh, the company also debuted four new Fire tablets, expanded Amazon Fresh to Germany, launched Prime Now in Singapore, saw the take-off of its 25th Prime Air plane, and hired more than 30,000 new employees — all of which costs money.
Overall operating expenses rose 28.2% year over year and 7.5% sequentially. Wall Street, which hates the amount of money AMZN spends to grow its e-commerce empire, was clearly disappointed by these results. The company’s Q3 profit guidance of negative $400 million to $376 million, versus Street consensus of $950 million, suggest there will be more of the same. But that level of spending is not unusual for Amazon, which tends to ramp up as it prepares for the holiday shopping season.
What’s more, unlike brick-and-mortar has-beens like Macy’s Inc. (NYSE:M), Sears Holdings Corp (NYSE:SHLD) and J. C. Penney Company Inc (NYSE:JCP) that are entrenched in antiquated ways of doing business, Bezos is focused on building the company’s ecosystem, while providing sustainable and predictable revenue growth. Plus, amid the doom-and-gloom, investors overlooked the fact that Amazon Web Services (AWS) — its dominant cloud business — posted revenue of $4.1 billion, up 41% from $2.9 billion last year.
Operating profit for AWS also surged, climbing to $916 million from $718 million in the year-ago period. And when factoring in that Amazon’s total consolidated operating income was only $628 million, this means AWS accounted for almost 70% of those profits, underscoring the strength in that business.
Cloud Competition
Ahead of the quarter, there were concerns that competing cloud platforms from Microsoft Corporation (NASDAQ:MSFT) and Alphabet, Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) were pressuring AWS, particular as Microsoft — in its most-recent quarter — nearly doubled Azure cloud revenue year-over-year.
But despite the fact that AWS is four times the size of Azure, it’s noteworthy that Amazon’s cloud business is still growing north of 40%. And there are no meaningful signs of slowing down.
Plus, fresh off its $13.7 billion blockbuster bid for Whole Foods Market, Inc. (NASDAQ:WFM), AMZN continues to push the envelop on what is possible at the intersection of retail and tech. With Whole Foods coming on board, Bezos will have an asset to help take on the $800 billion U.S. grocery business.
Bottom Line for AMZN Stock
Jeff Bezos doesn’t operate in the manner Wall Street analysts would like, that is, insisting on focusing on near-term profits. If he did, AMZN stock wouldn’t be the juggernaut that it has become and will continue to be. As I see it, AMZN didn’t “miss” on its Q2 earnings on Thursday, Wall Street did.
As of this writing, Richard Saintvilus was long AMZN stock.
