The market can get a big company’s earnings as wrong as a small ones. This is even true for Amazon (NASDAQ:AMZN), which reported after the market closed Oct. 28. AMZN stock shares plunged almost $150 each, 4.3%, in overnight trading after it reported net income of $3.16 billion, $6.12 per share, on revenue of $110.8 billion.
Amazon had been expected to report $9.10 per share of earnings on $111.6 billion of revenue. The bottom line missed by around $3 per share, the top line by less than $1 billion. But the stock was hammered anyway. It dropped the trailing price-earnings ratio to 58, even on lower earnings.
Did they even read the release?
The Where of Earnings
Amazon is a huge merchant, but it’s also a Cloud Czar. It makes an enormous amount of money renting its computer capacity.
The shortfall this time was all on the merchandise side. Product sales came to $54.9 billion. Service revenue was $55.9 billion. More important, Amazon Web Services revenue was $16.1 billion, against $11.6 billion just a year ago. That’s growth of 39%, at scale. Profits from the unit came to $4.88 billion, which means 30% of revenue became net income. North American operations made just $880 million on revenue of $65.6 billion.
The difference in margins is no accident. This is why retailers sell for a discount of sales, while tech company stocks can sell for 10-20 times sales. It’s because margins are so much bigger in technology. Amazon is now the mightiest computer company in the world.
You’re going to sell that?
The Cops Close In
It’s doing it because the businesses are huge. In the second quarter alone, AWS had almost $4.2 billion in operating income on $14.8 billion in sales. Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud, by contrast, lost money while gaining minimal share.
Amazon has disrupted every business it touched, from shopping to computing to how books are written. For those shocked by the speed of change, founder Jeff Bezos makes the perfect bogey man, the classic “man behind the tree” who will pay for everything.
The media attitude is one reason I have suggested AWS might bring in more business if it were no longer associated with the store. Standing on its own, AWS could enter the world of enterprise computing against Google and Microsoft (NASDAQ:MSFT). Its device business, including the Fire tablet and Alexa voice interface, could take on Apple (NASDAQ:AAPL). It may be the only company in the world that could do both.
Prime Video, meanwhile, is the biggest competitor to Netflix (NASDAQ:NFLX). Charging for it separately is a risk, but it’s the only streamer other than Netflix with a true global footprint. As the success of the Korean show Squid Game showed, this creates a virtuous cycle. Programs produced for Asian or European audiences can indeed translate.
Separated from the cloud, the store, meanwhile, might be able to focus on new markets like healthcare if it were standing on its own. Amazon has owned Pillpack, an online drugstore that packages daily doses, since 2018. If it paid proper attention to the business, Amazon could revolutionize healthcare.
The Bottom Line
Wall Street sees scale as dangerous. It brings problems. It puts a target on your back.
Amazon still sees scale as an opportunity. It operates across an enormous front and, if broken up, would not carry an antitrust threat. AWS only has 30% of its market. Prime Video has enormous untapped potential.
If the company did break up, I’d sell the store and double-down on media and cloud. The store is in position to deliver a dividend and its infrastructure is essential.
Meanwhile, the fall of Amazon’s stock price on merchandise sales is a huge buying opportunity
On the date of publication, Dana Blankenhorn held positions in AMZN, AAPL 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. Just in time for Halloween he has a collection of COVID-19 stories https://www.amazon.com/Bridget-OFlynn-Virus-COVID-19-Pandemic-ebook/dp/B09K8PSQC8/ at the Amazon Kindle store. Write him at email@example.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.