Well lo and behold, Amazon (AMZN) managed to turn an unexpected profit last quarter, its Amazon Web Services (or AWS) division slightly widened its operating profit margins rather than shrinking them after the company saw phenomenal revenue growth from its web services venture.
Could it be that AMZN stock is finally en route to becoming an investment in the company’s earnings potential, rather than just a mere investment in a growth story?
Possibly … though let’s not get too presumptuous just yet. After all, one decent Amazon earnings report doesn’t make a trend.
On the other hand, we’re also seeing some things from the non-AWS side of Amazon that were pleasant surprises — signs that the e-commerce giant has finally found a winning formula.
Amazon Earnings, By the Numbers
Last quarter, Amazon earned 19 cents per share on $23.2 billion in revenue. It was, by any measure, a blowout quarter. Aside from the fact that the company swung from a loss of 27 cents per share of AMZN stock in its second quarter of 2014 back to a profit in the second quarter of this year, the top line was up a hefty 20% on a year-over-year basis.
And estimates? They were pretty well left in the dust. The pros were only expecting earnings of 14 cents per share of AMZN stock on $22.4 billion.
As for guidance, Amazon has largely sustained its tradition of relative ambiguity by forecasting sales growth of anywhere between 13% and 24% for the current quarter. The company also suggested its operating income for Q3 could roll in anywhere between a loss of $480 million and a profit of $70 million. Just bear in mind that Amazon’s guidance, though frustratingly vague, is also usually more than a little conservative.
Digging Deeper
While the Amazon earnings numbers were solidly better, there’s no denying the bigger-picture results weren’t the focal point of yesterday afternoon’s news. All eyes were on how profitable Amazon Web Services was. However, AWS wasn’t the most curious part of the earnings story.
For what it’s worth, AWS revenue grew 81% on a year-over-year basis last quarter, reaching $1.82 billion. Better yet, the AWS segment’s operating income of $391 million — translating into operating margins of 21%. Surprising to many, margins on Amazon’s cloud services have so far widened rather than narrowed in the face of increasing competition.
For perspective, in the first quarter, AWS generated $1.56 billion in revenue, and converted $265 million of it into a profit for a gross profit margin rate of 17%.
Though it remains to be seen if the trend is sustainable, it’s a metric woth keeping tabs on in future quarters. AWS could turn out to be a huge driver for AMZN stock.
The more curious part of the Amazon earnings snapshot, however, may not have been AWS results. Product sales in North America jumped 25% in the second quarter, from $10.99 billion to $13.79 billion. Better still, North America’s operating profit from product sales grew 113%, from $329 million a year ago to $703 million this time around. It was the second quarter of big-time profit growth from sales of products, even as international sales remain slightly unfruitful for the bottom line.
As for a specific explanation, none has been given. Clearly, however, the company is doing something different now than it’s done in the past in terms of pricing, cost-control, scale, or a combination of all three.
Bottom Line for AMZN Stock
While the numbers do suggest Amazon is pointed in the right direction — towards earnings rather than just towards revenue — caution is still advised for those investors who are waiting on AMZN stock to reach the end zone of reasonable, sustainable profits.
It would only take one cash-burning growth initiative to wipe it all away, as we’ve seen so many times from project-loving CEO Jeff Bezos. The Kindle Fire, drones, and a hell-bent effort on setting up fulfillment/delivery centers wherever swell of customers may be are just some of the ways the company has blown through money with a questionable ROI.
And yet, we’re at least starting to see glimmers of vindication a company that’s been long criticized for spending too much to gain too little.
Let’s just hope the company’s critics don’t look too closely at the cash flow statements.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
