ii view: pandemic is 200% boost to Amazon profits
Covid costs are significant, but there can be little doubt this online behemoth is a pandemic winner.
30th October 2020 15:38
by Keith Bowman from interactive investor
Costs to battle Covid are significant, but there can be little doubt that this online mammoth is a pandemic winner.
Third-quarter results to 30 September 2020
- Net sales up by 37% to $96 billion (£74 billion)
- Net income up 200% to $6.3 billion (£4.85 billion)
- Diluted Earnings Per Share (EPS) up 192% to $12.37
Guidance:
- Expects Q4 sales of between $112 billion & $121 billion, giving year-over-year growth of 28% to 38%
- Expects operating income of $1 billion to $4.5 billion
Chief executive Jeff Bezos said:
“Offering jobs with industry-leading pay and great healthcare, including to entry-level and front-line employees, is even more meaningful in a time like this, and we’re proud to have created over 400,000 jobs this year alone.
"We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season. Big thank you to our employees and selling partners around the world who’ve been busy getting ready to deliver for customers this holiday.”
ii round-up:
Online retail giant Amazon (NASDAQ:AMZN) reported record third-quarter profit and forecast-beating sales aided by the pandemic, but failed to inspire investors as Covid cost clouded fourth-quarter estimates.
Earnings per share of $12.37 and sales of $96 billion (£74 billion) flew past Wall Street estimates of nearer to $7.50 and $93 billion. However, wide profit guidance for the next quarter of between $1 billion to $4.5 billion, and allowing for Covid related costs of around $4 billion, generated some disappointment.
Amazon shares fell around 4% in US trading, having gained by more than 70% year-to-date. Shares for China-focused Alibaba (NYSE:BABA) are up just over 45% in 2020, while eBay (NASDAQ:EBAY) shares have gained around 35%. Online UK electrical retailer AO World (LSE:AO.) has seen its shares soar by nearly 300% and internet food delivery company Ocado (LSE:OCDO) is up by nearly 80% year-to-date.
The American giant’s grocery sales have soared during the pandemic. Grocery delivery capacity was increased by over 160% in the prior quarter, and the number of grocery pickup locations was tripled to aid Covid hindered customers.
Additional jobs created at Amazon have included 10,000 new permanent jobs in the UK, raising its total to 40,000. In 2019, its home US market still accounted for nearly 70% of total turnover. The UK and Germany each generated around 7%.
Its cloud computing data division, Amazon Web Services (AWS), reported revenues of $11.6 billion for the period, up 29% year over year, unchanged from the prior quarter. Its customers include BP (LSE:BP.), Expedia (NASDAQ:EXPE), and the NHS, which has used AWS to help it analyse hospital occupancy levels, emergency room capacity and patient wait times to best allocate resources. In 2019, AWS accounted for just over 12% of overall revenues. It competes with the likes of Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and IBM (NYSE:IBM).
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. 2020 and the pandemic have brought both opportunity and challenges. Population restrictions and the disruption to many of its high street rivals has presented an opportunity, but protecting its own staff will cost around $4 billion in the festive period.
For investors, the watch of governments and their concern for the growing dominance of tech giants offers concern. A stock market valuation comfortably over $1.5 trillion is eye-watering, yet a forward price/earnings (PE) ratio of around 100 implies that investors and analysts continue to anticipate further growth. As with the other mighty US tech stocks, the debate about valuation is ongoing. But Amazon remains the retail market leader and is 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
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