Alexa, Did Investors Overreact to Amazon’s ‘Big’ Miss?

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Amazon.com (NASDAQ:AMZN) is still down more than 7%, a week after “missing” second quarter analyst sales estimates by $2.3 billion. AMZN stock can’t seem to climb back after falling off the cliff following the July 29 report.

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Q2 sales came to $113.1 billion. Analysts had been predicting $115.4 billion. To put that in perspective, sales in the same quarter of 2020 came to $89 billion.

What made this 27% growth especially shameful was that it included the company’s Prime Day sale, pulled forward into June from July. Amazon sold over 250 million items during the promotion. Analysts wondered whether the company could continue to grow.

Alexa, can Amazon continue to grow? Oh Dana, spare me.

Trucks vs. Clouds

Amazon sales generally rise as the year goes on. Last year’s third quarter saw $96 billion of revenue. The fear is that it may miss that because Prime Day was pulled forward. It’s called a “post-pandemic” hangover.

This misses the essence of the company. It’s more like Alphabet (NASDAQ:GOOGL) pulling Walmart (NYSE:WMT). The store is the least profitable part of the business. International sales have just passed breakeven, and North American sales have a margin under 5%.

Amazon Web Services (AWS) is a Cloud Czar. There are only five of them in the U.S., and only three rent their capacity. Any company that wants to operate in the cloud will see AWS, Alphabet or Microsoft (NASDAQ:MSFT) as its gatekeeper. Amazon now has a global network of scaled data centers and 32% of the cloud rental market. That’s more than Alphabet and Microsoft have combined.

AWS is on pace to bring in $59 billion this year. That makes it bigger than HP (NYSE:HP) and bigger than Cisco Systems (NASDAQ:CSCO), growing at 37% per year. Cloud growth is literally “re-accelerating.” AWS is also awesomely profitable, bringing 28% of revenue to the net income line. Alphabet continues to lose money on its cloud rental business.

It’s not like retail is a failure. Its Whole Foods grocery stores were hammered by the pandemic, but they’re now recovering, according to Placer.AI. Its Amazon Fresh stores, with “Just Walk Out” technology that eliminate checkers, see very little overlap from Whole Foods customers, says Placer. The company ended the quarter with 20 Amazon Fresh locations. Many more are coming. As they do it will add same-day delivery of groceries to the online store.

The Risk of Breakup

The biggest risk to Amazon is a government breakup. For most of the company this would be a good thing. It would let retailers focus on retail, and cloud folks focus on cloud.

The only risk would be to Prime Video operations, which ride on the cloud and are bundled along with free shipping. How many of its 200 million Prime members would pay for a service they now rationalize as free?

Prime Video is bulking up with sports rights, 20 Emmy nominations, and two of the most-popular streamed action movies of the quarter. As consumers move to free, ad-supported streamers, its ad-supported IMDb helped advertising grow 87% during the quarter. They’re also buying MGM. They’re also still the leader in streaming hardware with the Fire TV stick. Could all this remain profitable if Amazon Prime were paying for its cloud services? Netflix (NASDAQ:NFLX) runs on Amazon.

For years the knock on Amazon was that it didn’t make money, that it was focused only on cash flow. Amazon has generated over $59 billion in operating cash flow over its last 12 months. At its Aug. 4 closing price of about $3,354, it’s selling at just 29.01 times that. The price-to-earnings ratio has dropped below 60.

The Bottom Line in AMZN Stock

At its present level AMZN stock is the ultimate defensive play. Most of the company is still involved in hyper-growth. All aspects of the company are profitable.

The risk is that governments could seek to destroy it. A recent European Union fine of $886 million over its use of data in advertising, which Amazon will appeal, represents 11% of its second quarter net.

But as I’ve said before, go ahead. Break it up. Make my day. I can see no reason why I should sell my shares, even if they dropped 10% overnight. If I had the money I’d buy more.

On the date of publication, Dana Blankenhorn held long positions in AMZN and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2021/08/alexa-did-investors-overreact-to-amazons-big-miss/.

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