ii view: why Amazon shares just got 7% cheaper

Sales of over $100 billion disappointed Wall Street. We take a look at prospects. 

Second-quarter results to 30 June 

• Net sales up by 27% to $113.1 billion (£84.4 billion)
• Operating income up 33% to $7.7 billion (£5.5 billion)
• Earnings per share up 47% to $15.12

Guidance:

• Expects Q3 sales of between $106 billion and $112 billion, giving year-over-year growth of 10% to 16%
• Expects operating income of $2.5 billion to $6 billion compared with $6.2 billion in Q3 2020

Chief executive Andy Jassy said: 

“Over the past 18 months, our consumer business has been called on to deliver an unprecedented number of items, including PPE, food, and other products that helped communities around the world cope with the difficult circumstances of the pandemic. 

“At the same time, AWS has helped so many businesses and governments maintain business continuity, and we’ve seen AWS growth reaccelerate as more companies bring forward plans to transform their businesses and move to the cloud.”

ii round-up:

Online retailing mammoth Amazon (NASDAQ:AMZN) delivered both disappointing sales and outlook guidance in these latest results, as its numbers began to lap stellar pandemic fuelled comparatives from last year. 

Sales for the second quarter to the end of June came in at $113.1 billion, below Wall Street expectations nearer to $115 billion. Guidance or management forecasts for the current third quarter to the end of September also suggested year-over-year sales growth of up to 16%. That’s down from third quarter 2020 sales growth of 37%. 

Amazon shares are down over 7% Friday, leaving them up by close to 90% since virus induced market lows in March 2020. Shares of eBay (NASDAQ:EBAY) have more doubled over that time, while Chinese online retailer Alibaba (NYSE:BABA) is up just over 10%.

Management noted that “Amazon expects to see slower growth continue for the next few quarters.” That echoed cautious outlook comments from both Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB). A reopening of stores in many of Amazon’s markets such as the UK may also now be dragging on performance.

Broker Morgan Stanley flagged increased investment in logistic operations, additional staff, and spending at its cloud computing business, AWS, as weighing on profits. Amazon expects operating income during the current third quarter to the end of September of between $2.5 billion to $6 billion compared with $6.2 billion in Q3 2020.

New customers for its AWS business during the period included telecom provider Swisscom, North American financial services company BMO Group and sports car maker Ferrari (NYSE:RACE). Revenue growth for the division of 37% year-over-year to $14.8 billion was up from growth in the prior quarter of 32%.

The results marked the first to be announced by new chief executive and former head of its AWS business, Andy Jassy. 

ii view:

Amazon has given 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. The latest quarterly revenue total of nearly $15 billion makes AWS a sizeable business in its own right.  

For investors, vaccines and the opening up of economies following required lockdowns may now be calming the tailwind Amazon has received from the pandemic. Tough comparatives ahead and the uncertainty of a new CEO at the helm also warrant consideration. So does government concerns regarding the growing dominance of tech giants. 

But the core retailing business is now also accompanied by growing media and cloud businesses. A still elevated estimated price/earnings (PE) ratio suggests that analysts continue to anticipate ongoing growth. And, despite arguably dipping its toe in the water of the food retailing ocean, it could still do much more here. For now, and while some near-term caution looks sensible, it’s difficult to see this mammoth of the retailing world not making further progress over the long term. 

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
• Subject to tech valuation concerns

The average rating of stock market analysts:

Strong buy