The market response to Amazon (NASDAQ:AMZN) reporting its second quarter earnings is not unexpected, given lower-than-expected profit margins. However, with a strong revenue beat, the growth engine for Amazon stock is still grinding and AWS is still generating plenty of cash, so there is no reason to bail now.
It’s no secret that the market can be very short-sided. As savvy investors — as opposed to traders — the goal is to look beyond the short-term price movements and maintain perspective on the bigger picture.
If anything, the mixed results underscore that AMZN’s focus on building a long-term durable moat is still working. The large investments that Amazon has been making into its supply chain and fulfillment capabilities are undoubtedly going to be a near-term drag on profits.
That’s why it is important to keep the big picture in mind. AMZN still looks very attractive from a cloud and e-commerce standpoint, and let’s not forget that Amazon has a number of other ventures in auto makers and broadband that could pay off in a big way.
AMZN Stock Second-Quarter Highlights
Amazon stock dropping over 2% immediately after the lower-than-expected guidance is just the market being myopic. There is always going to be some short-term choppiness in quarterly earnings as new ventures eat up a disproportionate amount of investment capital.
$800 million in Q2 to improve Amazon’s fulfillment capabilities and deliver on its new goal of a one-day shipping standard for Prime members is a lot of money well spent. The results just have not had a chance to be reflected in the numbers.
Margin compression is a natural occurrence as major infrastructure investments are undertaken. It’s easy to see though, how in future quarters, this negativity flips to the positive as shorter delivery times leads to stickier consumers spending more money and more time on the platform. It’s worth noting that as consumers spend more time on AMZN’s platform, the Company can monetize this in the form of advertising revenues, which has been growing at solid double-digit clip as it is.
Though revenue growth was just 20% year-over-year, with the results of the biggest Prime Day yet, expect the next quarter to see a much higher growth rate. As Bezos has publicly stated, “we’re just getting started.”.
AWS and Ad Revenue Seeing Continued Growth
Amazon Web Services is Amazon’s most profitable business and reported 37% growth despite facing greater competition from Azure and GCP. Cloud is AMZN stock’s cash generating machine and continues to do just that as the shift to cloud sees demand across the board from corporations to schools to government agencies.
As mentioned earlier, investors should also keep an eye on Amazon’s online-ad business, which is bucketed under the “Other” category. Revenues grew similarly to AWS at 37% to $3 billion. It has the potential to double and triple as consumers spend more time on Amazon’s web and app platforms.
Amazon Stock Beyond Retail… And Beyond Earth
Jeff Bezos’ newest “big bet” is to put more than 3,200 satellites in low Earth orbit for global broadband coverage under the name, Project Kuiper.
With a company that has grown to a market capitalization of $956 billion, it’s crucial to have a leader who thinks big. Small projects understandably won’t move the needle. In the same way, as investment funds grow their assets under management, they are forced to look toward larger investments to effectively deploy their capital.
According to Bezos, this venture will end up “servicing the whole world.” It’s a high capital expenditure undertaking, which Amazon is an expert at and will help Amazon earn a return on a substantial amount of its capital.
Big things continue to be on the horizon for Amazon and Amazon stock, and in the meantime, their core businesses are growing meaningfully.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
