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

by Keith Bowman from interactive investor |

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

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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