Amazon.com, Inc. (Nasdaq: AMZN) reported second-quarter earnings on Thursday afternoon, beating on revenue but missing earnings expectations. AMZN stock fell more than 2 percent in after-hours trading.
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Going into the report, Amazon stock was up 39 percent year-to-date and 340 percent over the last five years.
Amazon earnings by the numbers. The Seattle-based e-commerce giant reported Q2 earnings per share of 40 cents, down 77.5 percent from the same quarter a year ago, on revenue of $38 billion, an increase of 25 percent.
Analysts were expecting EPS of $1.42 on revenue of $37.18 billion, so the bottom-line number was really disappointing from a Wall Street perspective.
But investors know that Amazon’s earnings can be rocky and unpredictable, as the company likes to experiment in businesses that can lose money for years and that later become licenses to print money. And zooming out, there were some bright spots to Amazon’s Q2 report.
“While there will be a lot of focus on Amazon’s big EPS miss today, at Merkle, we’re particularly interested in the growth of Amazon’s ad business, which has been estimated to generate over $2 billion in revenue a year,” says Mark Ballard, vice president of research at Merkle. The online ad business also tends to have a much higher margin than retail.
“This quarter, Amazon’s other revenues, which are believed to include ads like Sponsored Products, grew 51 percent compared to a year earlier,” Ballard says, highlighting an exciting growth area in the massive company.
Revenue at Amazon Web Services (AWS), Amazon’s fast-growing and highly profitable cloud-computing arm, was also impressive, growing 42 percent year-over-year. AWS competes with Microsoft’s ( MSFT) Azure, as well as cloud offerings from Google ( GOOG, GOOGL) and IBM ( IBM).
AWS made up more than 100 percent of the company’s operating income in the second quarter: Operating profits at AWS were $1.8 billion, while the wider company’s operating profits were just $1.63 billion. In short, AWS is the profit engine that allows Amazon to run low-margin businesses and experiment in new industries, all while remaining in the black.
CEO Jeff Bezos also boasted about a new calling and messaging feature on Alexa-enabled Echo devices, and mentioned that the company’s third-annual Amazon Prime Day brought in more new Prime members than ever before.
Acquisition of WFM. The biggest company-related news in the second quarter was far and away Amazon’s surprise acquisition of Whole Foods Market ( WFM) for $13.7 billion. The June 16 announcement hit shares of both grocers and rival retailers like Walmart ( WMT) and Target ( TGT) hard.
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There’s a reason for that. Historically, when Amazon enters an industry, it hasn’t been good for competitors. Retail electronics is a classic example, with Amazon’s dirt-cheap pricing, convenient online shopping and quick delivery driving companies like Circuit City and Radio Shack to bankruptcy.
And when Amazon debuted its Kindle e-reader, it was the nail in the coffin for Borders, which had already been suffering as a higher-cost brick-and-mortar bookstore that couldn’t afford to compete with Amazon on pricing.
“The acquisition is viewed by the publicly traded grocers as Amazon’s ‘rite of passage’ to the $800 billion grocery market, and signals the further reduction of an already paper-thin industry profit margin,” says K C Ma, professor of finance at Stetson University.
“Amazon has fired the first shot to start the beginning of the end for the traditional grocery business,” Ma says.
As longtime AMZN stock owners know, the company has long harbored ambitions to enter the online grocery delivery market, and now with 468 brick-and-mortar stores in prime locations across the U.S., Amazon instantly has physical hubs from which it can make those deliveries.
Bezos, the brilliant billionaire. Amazon’s extreme outperformance actually made CEO Jeff Bezos the richest person in the world Thursday morning, as he vaulted Microsoft founder Bill Gates. Going into earnings, Bezos held nearly 80 million shares of AMZN stock, and was worth over $90 billion.
After Q2 earnings, it looks like that reign may have been temporary, and he’ll be handing the title back to Gates. At least for now.
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While most AMZN shareholders can’t say they’re billionaires, they can say they’ve enjoyed a phenomenal run recently. Don’t let today’s earnings report distract you from the fact that Amazon is simply a great business.
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Amazon.com, Inc. Profits Fall 77 Percent, But AMZN Stock Still a Winner originally appeared on usnews.com
