ii view: Amazon sales rocket

Covid has raised challenges for Amazon, but further rapid growth is expected.

Second-quarter results to 30 June 2020

• Net sales up by 40% to $88.9 billion
• Operating income up 87% to $5.8 billion
• Diluted Earnings Per Share (EPS) up 97% to $10.30

Guidance:

• Expects Q3 sales of between $87 billion & $93 billion, giving year-over-year growth of 24% to 33%

Chief executive Jeff Bezos said: 

“This was another highly unusual quarter, and I couldn’t be more proud of and grateful to our employees around the globe. As expected, we spent over $4 billion on incremental COVID-19-related costs in the quarter to help keep employees safe and deliver products to customers in this time of high demand—purchasing personal protective equipment, increasing cleaning of our facilities, following new safety process paths, adding new backup family care benefits, and paying a special thank you bonus of over $500 million to front-line employees and delivery partners. 

We’ve created over 175,000 new jobs since March and are in the process of bringing 125,000 of these employees into regular, fulltime positions. And third-party sales again grew faster this quarter than Amazon’s first-party sales. Lastly, even in this unpredictable time, we injected significant money into the economy this quarter, investing over $9 billion in capital projects, including fulfillment, transportation, and AWS.”

ii round-up:

Online retailing giant Amazon (NASDAQ:AMZN) reported a 40% jump in second-quarter sales to $88.9 billion as consumers proved increasingly happy to use its services under pandemic lockdowns across many parts of the world. 

And, despite over $4 billion of Covid-related costs such as Personal Protective Equipment (PPE) to help protect staff, earnings of $10.30 per share blew past analyst consensus estimates at below $2 per share. 

Amazon shares rose by more than 5% in after-hours trading having already gained by more than 60% year-to-date. Shares for eBay (NASDAQ:EBAY) are up over 50% in 2020, while shares for China focused Alibaba (NYSE:BABA) are up just shy of 20%. Shares for online electrical retailer AO World (LSE:AO.) are up by more than 75% in 2020 while Ocado (LSE:OCDO) shares have gained by over 60%. 

Amazon online grocery sales tripled in the period compared with the second quarter last year. Grocery delivery capacity was increased by over 160%. The number of grocery pickup locations was tripled in order to aid customers during the pandemic. 

The online giant expects to spend a further $2 billion during the third quarter on additional coronavirus-related measures, including PPE, deep cleaning its facilities and wage increases for employees. 

During the quarter it also announced new or expanded integrations for its AI Alexa devices with global automotive brands including General Motors (NYSE:GM), Volkswagen (XETRA:VOW) and Toyota. Subscription services, including sales from Prime memberships, rose by nearly 30% to $6.02 billion.

Its cloud-computing data division, Amazon Web Services (AWS), reported revenues of $10.81 billion for the period, up 29% year over year, but a slight slowing from the 33% gain it reported in the first quarter. Video communications provider Zoom is a customer while banking group HSBC (LSE:HSBA) recently selected it to provide app personal banking facilities to its global customers. 

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. The group’s AWS business also offers attractive growth potential. North America still generates by far the lion’s share of sales at 62%, followed by international at 26% and AWS at 12%. 

Now Covid-19 has brought both opportunity and challenges. Population lockdowns and the closure of many of its high street rivals has given it opportunity, while protecting its own staff has clearly created challenges. 

For investors, the increasing gaze of governments and their concern for the dominance of tech giants such as Amazon may be cause for concern. A stock market value comfortably over $1 trillion is eye-watering, yet a forward price/earnings (PE) ratio of over 150 implies that investors and analysts continue to anticipate much more growth. As with the other mighty US tech stocks, the debate about valuation is never far away, but Amazon is the retail market-leader and streets ahead of the rest - it's why investors keep buying. 

Positives

• Dominant position in online retailing
• The Amazon Web Services (AWS) business is now a major global player

Negatives

• The threat of increased regulation across many of its markets
• Management succession risk – who might replace current CEO and founder Jeff Bezos

The average rating of stock market analysts:

Strong buy