Amazon.com, Inc. (NASDAQ:AMZN) fans and followers were mostly fearless during Thursday’s trading, heading into the company’s post-close earnings report, bidding AMZN up nearly 4% during regular trading hours. Their guts paid off — Amazon’s shares are up nearly 9% in early morning action in response to an earnings report that left practically nothing to be desired.
Too much, too fast, with the stock plowing into record-high territory? Sure, AMZN shares will likely see some profit-taking pressure soon. That’s just trading.
This is a stock, however, that has repeatedly rewarded investors willing to buy the dips despite lackluster value argument. This is one story stock where top-line growth and minimal profitability has been enough.
Amazon’s Earnings Recap
For the quarter ending in March, Amazon.com earned $3.24 per share on revenue of $51 billion. Analysts were modeling a top line of $49.9 billion, translating into a bottom line of $1.27 per share. The e-commerce outfit reported sales of $35.7 billion for the first quarter of 2017, when it earned $1.48 per share of AMZN stock.
The projected lull in earnings is, or was, a microcosm of the company’s ramped-up spending to connect with consumers in ways beyond traditional e-commerce. Some of the expected increase in spending, however, was the result of loss-making pushes into new foreign markets.
As it turns out though, the spending more than paid for itself. Operating income nearly doubled from the year-ago figure of $1.0 billion to $1.93 billion last quarter.
CEO said Jeff Bezos said of the Q1 numbers:
“AWS had the unusual advantage of a seven-year head start before facing like-minded competition, and the team has never slowed down. As a result, the AWS services are by far the most evolved and most functionality-rich. AWS lets developers do more and be nimbler, and it continues to get even better every day. That’s why you’re seeing this remarkable acceleration in AWS growth, now for two quarters in a row.”
AWS, or Amazon Web Services, saw sales grow 48% last quarter, from $3.66 billion to $5.44 billion. That was enough to improve the cloud computing arm’s operating profit from $890 million to $1.4 billion.
E-commerce sales in North America were up 46% to $30.7 billion, boosting that division’s operating income by 92% to $1.15 billion. Its loss from international e-commerce operations, however, widened from $481 million to a loss of $622 million despite sales growth of 34% to $14.9 billion.
Drilling Down
The big profit growth for Amazon Web Services last quarter came as no real surprise. While its domestic e-commerce operation has moved sustainably into the black, its cloud computing arm is still commanding profitable prices despite a fierce battle (as Bezos alluded to) with the likes of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT) on that front.
The company’s effort to create an even more engaging customer ecosystem appears to be paying off too, despite the added cost incurred.
Case(s) in point: Its Alexa-powered Echo technology just got even better. Now it’s capable of remembering things to remind you of later. And, now that the world is becoming comfortable with AI-powered assistants, parents are becoming okay with letting the platform teach kids to use manners when speaking to the artificial entity.
More and more users are becoming part of an Amazon-powered world too. Its Prime program, which offers free two-day shipping on most items bought online plus access to a solid library of audio and video content now boasts more than 100 million members. Prime members are known to spend more at the website than non-members do, so it’s no surprise revenues and memberships have grown hand in hand.
In that regard, Bezos’ intuition about the importance of fostering different kinds of connections with consumers — with Prime and Alexa-powered Echos — has proven spot-on.
It’s not entirely been smooth sailing for Amazon.com of late, however. President Donald Trump has lamented, though without any specifics, that Amazon isn’t paying its fair share of taxes.
It remains to be seen how, or even if, that might work against the e-commerce outfit. If it somehow means it will be forced to start collecting state-level sales taxes, the matter could dent Amazon’s lead in the low-price race.
Such a change doesn’t appear to be in the cards right now, though.
Looking Ahead for AMZN
For the quarter now underway, net sales are projected to come in somewhere between $51.0 billion and $54.0 billion, up between 34% and 42% year-over-year — a range upped to the tune of $1.2 billion thanks to favorable exchange rates. At those levels, second-quarter operating income should be between $1.1 billion and $1.9 billion, well up from the $628 million reported in the comparable quarter a year earlier.
It’s getting difficult to say Amazon.com isn’t equipped to become viable. The $64,000 question: Should I buy Amazon stock?
There is no easy answer.
From a value-based perspective, certainly not. Even with the near doubling of its profits, AMZN stock remains at valuations the market wouldn’t tolerate for any other equity.
From a trading perspective though, it’s difficult not to like the persistent momentum the company and the stock seem capable of producing. As long as you understand it’s a crowded trade and not an investment you can turn your back on (or buy for grandma’s retirement portfolio), it’s earned its stripes.
Unfortunately, stepping into it right after it bumped into new highs may not be the time to be daring. The time to hold your nose and step in is when the mob is trashing it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
