Whether Amazon.com, Inc. (NASDAQ:AMZN) is “worth it” at its perpetually frothy valuation is a question that may never be answered. It’s a moving target. However, in the shadow of the 36% gain that AMZN stock has dished out in 2017 — not to mention its 240% run-up since the beginning of 2015 — it’s impossible to deny the market expects big things in the foreseeable future.
Unfortunately, investors will have to wait another three months for those big things.
While revenue was better than expected for the company’s second quarter, reported Thursday after the bell, soaring expenses prevented Amazon from getting anywhere close to its earnings estimates.
In response, AMZN stock was already unwinding some of the recent gain in Thursday’s after-hours trade.
Amazon Q2 Earnings Recap
For the period ending in June, e-commerce giant Amazon earned 40 cents per share on sales of $37.9 billion. That’s a 77% dip from last year’s $1.78-per-share profit, though the top line was nearly 25% better year-over-year. Likewise, the bottom line compares poorly to analyst expectations for $1.38 per share, though those same pros were modeling revenue of only $37.20 billion.
As has been the case for some time now, AMZN’s cloud computing arm, Amazon Web Services, carried most of the weight in terms of profitability, and also drove the bulk of its growth for the quarter in question. Over the course of the prior three months, Amazon did $4.1 billion worth of cloud computing business, up 43% from year-ago levels, and turned $916 million of that into operating income — a 27% improvement in AWS profits.
Amazon Web Services’ shrinking margins did not go unnoticed.
Increasing competition from the likes of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) are forcing Amazon to become more price-competitive.
Still, Amazon Web Services was the powerhouse in terms of profits. The company did 22.37 billion worth of e-commerce sales in North America, up 26% year-over-year, but operating income for the North America’s e-commerce operation fell from $702 million to $436 million. AMZN saw a similar revenue growth rate for its international arm, but the loss on the international front expanded from -$135 million in Q2 of 2016 to $724 million this time around.
Operating expenses were up across the board, with the company spending more on merchandise, fulfillment, marketing and technology. Those expenses grew more than revenue did.
Growth Engines
Whatever growth is in the cards, some observers are convinced the crux of it will be driven by increasing revenue outside of the United States.
Logistics technology company Freightos’ CEO Zvi Schreiber is one of those observers, recently noting:
“Amazon has been using direct seller education and even flat-out buying up U.S. seller inventory to encourage US sellers to start selling overseas, complemented by global air, ocean and trucking freight capabilities. Interestingly enough, Alibaba has recently engaged in its own attempts to cater toward US companies selling globally, which may accelerate a showdown between the two companies.”
Not everyone sees overseas markets as the next big growth opportunity though. Others feel lateral expansion into new business lines in geographical markets it already dominates are the key.
Case in point: Last month, the e-commerce behemoth announced it was getting into the grocery business by acquiring Whole Foods Market, Inc. (NASDAQ:WFM). Though the company has dabbled in foods for a while including a handful of drive-through grocery pickup spots, this is the first entry into full-fledged retailing that requires human customer service.
Amazon may have offered its bid at the ideal time too … right as the grocer begins to take a turn for the better. Whole Foods reported a healthy earnings fiscal third-quarter earnings beat.
There’s also the distinct possibility both avenues will be growth priorities for Amazon.
Looking Ahead for AMZN Stock
Regardless of how it happens, analysts are pretty certain there’s more growth on the horizon. The pros are expecting the current quarter’s profit to swell from last year’s 52 cents per share to $1.09 per share of AMZN stock. For the full year, the bottom line is expected to grow from $4.90 per share to $6.72. Nothing in the second quarter report suggests those numbers are unreasonable targets.
In fact, Amazon’s guidance underscores the likelihood of reaching them. For the third quarter of the year, the company is projecting revenue of between $9.25 billion and $41.75 billion, up between 20% and 28% year-over-year. That should translate into operating income of anywhere between -$400 million and $300 million, though both are shy of the $575 million in income reported in Q3 of 2016.
At least for today, those shrinking profit margins were enough to send AMZN stock to a loss of 2% after Thursday’s close.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
