Who would you rather be right now? Jeff Bezos or Mark Zuckerberg? If you own AMZN stock, I’m pretty sure I know the answer.
However, it’s really a trick question because if you’re honest with yourself, the answer is either of them. In a heartbeat.
All the chatter about Amazon’s lack of profits over the years has come screeching to an abrupt halt given that the company’s profit in the second quarter of 2018 was double analyst expectations.
Home-Run Quarter for AMZN Stock
This home run quarter — yes, I know, it only increased revenue by 39% to $52.9 billion, a tad below analyst expectations — reminds me of two things.
First, Bezos has become Matt Damon’s character in the movie Good Will Hunting and is going to be running around screaming “How ’bout them apples” to everyone he possibly can — including the president.
Secondly, what exactly is the point of analysts? I could have come up with that horrible estimate.
The critics of Amazon and AMZN stock are soon going to be extinct if the company keeps chipping away at all their arguments. The naysayers will be left clinging to statements such as “Amazon Prime lost five members in the quarter, strong evidence the company’s business model is broken” and other meaningless arguments.
If you haven’t figured it out by now, AMZN stock is going to be the first to $2 trillion.
At that point, Bezos will be so obscenely wealthy, the government will be forced to take action against the company by demanding its split-up.
What Would That Look Like?
I’ll use Amazon’s latest quarterly report to discuss.
The most natural way to split Amazon would be to divide the company into three pieces: AWS (cloud business), e-commerce and brick-and-mortar retail, and advertising.
In the second quarter, AWS’s revenue was $6.1 billion, its retail businesses generated $44.6 billion, and advertising delivered $2.2 billion.
Regarding year-over-year growth, AWS increased sales in the quarter by 49%, its retail businesses were up 43% — thanks in part to the addition of Whole Foods, and advertising was up a whopping 132%.
However, profits are another thing altogether.
In May, I pointed out that Amazon is effectively able to lose money in its retail businesses because of AWS — and now it’s also got advertising profits to offset against, which is the beauty of Amazon’s business model.
“I love Costco’s business model, and it’s a great stock to own, but it doesn’t hold a candle to Amazon whose AWS business generated $1.4 billion in operating income in the first quarter, a segment that all but ensures Amazon will continue to profitably grow its business,” I wrote May 1. “If Costco’s business model is good, Amazon’s is great.”
Two Might be Better Than Three
Splitting Amazon into three pieces would destroy that. It’s akin to separating a mother hen from her baby chicks before they’re ready.
Amazon had $3.0 billion in operating income in the second quarter, 378% higher than a year earlier. AWS generated 55% of the quarterly profit with retail snagging the rest.
Although it breaks out advertising sales, it doesn’t provide operating income, but I would guess it’s very profitable. Given North American retail saw a 321% year-over-year increase in operating profits, advertising is likely part of that.
So, I’m going to estimate advertising’s operating profit at a 25% margin or $550 million. AWS’s operating margin is 27%, and retail based on a $791 million operating profit has a 1.8% operating margin.
Can you see the problem?
If you separate the retail from the others, it loses its ability to reinvest in the business.
The Ultimate Solution for AMZN Stock
At the end of the day, if I were in charge of a split, I’d likely push for AWS to go independent while allowing Amazon to continue to benefit from its advertising business, which is growing exponentially.
Whatever happens, it’s a good thing if you’re Jeff Bezos and Amazon.
“Is Amazon the perfect stock?” I pondered in my May article. “It’s as close as you’re going to get in the ninth year of a bull market.”
After Amazon’s second-quarter earnings, I’m even more convinced.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.