Amazon Is No Longer Enjoying Record Profits But Continues To Grow

Jul 25, 2019
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Amazon (NASDAQ:AMZN) today reported second quarter results that were less-than-good. After four quarters of consistent record-breaking earnings, the online etailer fell short citing rising costs related to one-day shipping as a big reason profits fell.

Shares fell a mild 2 percent after Amazon reported its numbers. That would signal that Amazon indeed fell short of expectations, yet just to add some context, Amazon stock was up over 5 percent for the month before today so nothing was lost in the course of a month.

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  • EPS: $5.22 reported vs. $5.56 projected
  • Revenue: $63.4 billion reported vs. $62 billion projected
  • Spent $800 million deploying one-day shipping network

AWS $8.38 billion in revenue, but growth is slowing

Amazon Q2 2019 AWS

Amazon’s AWS turned in a solid 37 percent year-over-year growth rate for the second quarter with $8.38 billion in revenue. Analysts were predicting $8.48 billion, and so Amazon’s cloud business contributed to the miss as a whole for the company.

When it comes to operating income, AWS is contributing more than Amazon’s retail business in North America. In fact, given all of its global businesses combined, AWS contributed 52 percent of the total operating income, which simply can’t be understated.

Amazon highlighted that Slack had committed to spending $250 million on AWS over the next few years and the communications app joins a long list of government and corporate entities that are using AWS computing and storage services. Lyft also notified us in the quarter, via its prospectus before going public, that it expects to spend $300 million on AWS over just three years. Social media app Pinterest trumped them both – the visual communication platform will be spending at least $750 million with Amazon’s cloud unit over the next 6 years.

All is not well on the cloud front, however. Last week, Microsoft reported earnings and its own cloud business, Azure, posted a striking 64 percent growth which shows that AWS is slowing down as its competitors are beginning to speed up. Of course, there’s much more to these numbers – Amazon is the leader in the segment and its top-line growth must come from expanding the total addressable market more so than stealing work from Microsoft and others.

Amazon online business takes a hit to profitability as it invests in one-day shipping

Amazon Q2 2019 NA

CEO Jeff Bezos pointed to one-day delivery as a quarterly highlight. “We’ve received a lot of positive feedback and seen accelerating sales growth,” he said. “Free one-day delivery is now available to Prime members on more than ten million items, and we’re just getting started.” That positive feedback came at a rather steep cost, as the company estimated that it spent $800 million in the quarter deploying one-day delivery service on more than 10,000,000 items, all free for Amazon Prime shoppers.

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Take a look at the above graph, “North America” which is what Amazon calls its U.S.-based Amazon.com core business, and you will see that Q2 2019 saw a steep decline in income despite a 20 percent increase for the quarter as compared to a year ago. Amazon is probably feeling some pressure as Walmart (who hired the guy that architected Amazon’s two-day prime service) and others like Target are beginning to offer 2-day delivery for no annual fee. Amazon understands that it needs to differentiate from these services or it will risk losing subscribers over.

Overall Amazon is looking good. One-day shipping, once fleshed out will cease costing hundreds of millions of dollars, and the main thing to look at here is the total revenue: $63.4 billion which beat expectations by a billion. Amazon has always been about growth and its continuing to show solid numbers in both its online store and the all-important AWS segment. Its a master of reigning in costs when it needs to, and as pointed out on the earnings call, it generated $16 billion in free cash flows this quarter alone after accounting for capital and lease financing charges.

 

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