ii view: Sales boom at Amazon, but so do costs

Rising costs and disappointing profits overshadow further sales growth at the online retailer. 

Second-quarter results to 30 June 2019

• Net sales up 20% to $63.4
• Operating income up 3.3% to $3.1 billion
• Diluted earnings per share up 3% to $5.22

Chief executive Jeff Bezos said: 

"Customers are responding to Prime's move to one-day delivery — we've received a lot of positive feedback and seen accelerating sales growth. Free one-day delivery is now available to Prime members on more than ten million items, and we're just getting started."

ii round-up:

Amazon.com Inc (NASDAQ:AMZN) went public on 15 May 1997. Today, it employs more than 560,000 people and jostles with Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) as the largest listed US company. 

The company has three strings to its bow: North American retail, International retail and Amazon Web Services (AWS), which provides computer server data cloud services to corporate customers. Gogo and Lyft (NASDAQ:LYFT) and the National Association for Stock Car Auto Racing (NASCAR) are among recent new deals. 

There is mixed progress in these second-quarter results. A 20% increase in sales year-over-year to $63.4 billion beat analyst forecasts, and Amazon is guiding for between $66 billion and $70 billion of sales in the third quarter, equivalent to between 17% and 24% growth on the year before. 

Free cash flow increased to $25 billion compared to $10.4 billion in 2018.

But operating costs rose by 21%, pushed higher by a focus on one-day delivery to customers. A 37% increase in net sales for the high-growth AWS business was also less than some analyst expectations. 

It's why profit of $5.22 per share pulled up short of the $5.57 expected, and the share price retreated by over 2% in after-hours US stock market trading. 

ii view:

Amazon offers investors the chance to buy into a retail revolution. Often blamed for the demise of physical shopping outlets, the convenience that Amazon has brought to the shopping arena is evidenced by phenomenal growth.  

For investors, a stock market value of around $1 trillion might suggest that the best of its growth is now behind it. But a forward price/earnings (PE) ratio of over 70 implies that investors and analysts anticipate much more growth to come. Like Microsoft and Google parent Alphabet (NASDAQ:GOOGL), Amazon now competes to offer global corporations data server facilities. Any slip-up in growth will be punished, of course, and, as with the other mighty US tech stocks, the debate about valuation is never far away from Amazon. But it is the market-leader and streets ahead of the rest; it's why investors keep buying. The real test, however, will be how it copes with the next major economic slowdown.

Positives

• Dominant position in online retailing
• Amazon Web Services is now a major global player
• Voice recognition Alexa product dominates rivals Apple and Google

Negatives

• Threat of increased regulation across many of its markets
• Management succession risk – who might replace current CEO and founder Jeff Bezos
• Costs eat into profits

The average rating of stock market analysts:

Buy