Yahoo Finance AMZN Earnings Confirm Amazon's Dominance, Though Stock Wavers
Amazon.com (AMZN) posted major beats on both earnings and revenue on Thursday, although shares of AMZN stock didn't jump in quite the same way. Third-quarter guidance was also higher than expected.
Earnings per share came in at $1.78, an increase from 19 cents in the same quarter last year, while revenue was up 31 percent to $30.4 billion. Amazon and Alphabet (GOOG, GOOGL), which also posted a commanding beat Thursday afternoon, round out a week of high-profile earnings releases from some of the biggest names on Wall Street.
Analysts were expecting Amazon to report EPS of $1.11 on revenue of $29.55 billion.
"Amazon has not only established a strong foundation, namely with Amazon Prime and its Web Services, but also continues to invest in fulfillment centers, video content and data hubs that make them a more structurally profitable and diversified business," says James Gellert, CEO of Rapid Ratings, a financial health ratings firm. "It's no wonder why Amazon had such a great quarter."
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Amazon shares were up more than 11 percent for 2016 going into Thursday's report. In 2015, AMZN was the second-best performer in the entire Standard & Poor's 500 index, soaring 122 percent. While the stock didn't do much immediately after the big beat, shares were up 2.2 percent on Thursday before the release, so some of the gains may have already been factored in by the market.
The muted response is still unusual though, especially since Amazon's guidance also cruised past analysts' expectations. The company projected revenue between $31 billion and $33.5 billion in the third quarter, implying a midpoint at $32.25 billion that was meaningfully higher than the $31.63 billion consensus estimates.
The company's cloud computing arm, Amazon Web Services, is largely responsible for Amazon's pivot to profitability in recent years. AWS revenue soared 58 percent in the second quarter to $2.9 billion.
High margins, consistently high growth, and the ability to quickly leverage and scale make AWS the perfect cash cow that can fund Amazon's more ambitious, loss-producing exploits.
While the $99 annual fee it charges its Amazon Prime subscribers helps finance aggressive and expensive customer-centric services and perks like same-day delivery, the costs associated with those initiatives are growing rapidly. Fulfillment expenses rose by nearly 35 percent to $3.9 billion last quarter.
"Over half of American households are now Amazon Prime members," says Tien Tzuo, CEO of Zuora, a subscription billing, commerce, and finance solutions company. "Over 3 million Echos have been sold. Jeff Bezos has created a massive subscriber-based loyalty program that is doing to retail what Netflix (NFLX) and Spotify did to content. It's a pretty remarkable achievement."
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That's where the high margins of AWS come in handy. Despite accounting for just 9.5 percent of overall sales last quarter, the cloud leader generated $718 million in operating income -- nearly 56 percent of the entire company's operating income. To say the cloud is fueling the company's profitability is an understatement.
Driven by the larger role of AWS, operating margins rose again, more than doubling from 2 percent a year ago to 4.2 percent in the most recent quarter.
While AWS is the clear leader in the enterprise cloud computing arena, Microsoft Corp.'s (MSFT) Azure is widely considered the No. 2 player. Azure revenue rose 102 percent last quarter, although Microsoft doesn't break out exactly how much it made.
Sales growth, devices. North America revenues rose 28.1 percent to $17.7 billion, while international revenues rose 30.1 percent to $9.8 billion.
The Amazon Echo, a voice-controlled wireless speaker and virtual assistant, has continued to fly off the shelves. At $179.99, Amazon says that it couldn't keep it in stock in the first quarter, and during Amazon Prime Day -- which falls into the third quarter -- it sold out before the day was over.
Other Amazon devices like the Fire TV Stick and its Kindle Fire tablets, have also been huge successes.
Amazon products may be cheap, but its stock isn't. The rapid rise of AMZN stock leading up to Thursday's report doesn't come without its risks. Going into the second-quarter announcement, Amazon shares were trading at 307 times earnings and 75 times forward earnings, both steep premiums to the S&P 500, which trades for less than 25 times earnings and 18.4 times forward earnings.
The general idea with Amazon is that it will keep expanding into new verticals and growing market share until eventually it begins to enjoy larger and more significant economies of scale. AWS appears to have been the first significant step in making that vision a reality.
There are few markets Amazon feels it can't compete in, and this year it's even been taking steps towards becoming a legitimate shipping company in its own right. In two separate deals, Amazon has agreed to lease 40 Boeing Co. (BA) aircraft for periods of five to seven years, giving the company more shipping capacity and signaling a willingness to ease its reliance on FedEx Corp. (FDX) and United Parcel Service (UPS).
[Read: Facebook: Earnings Catapult FB Stock to All-Time Highs.]
Despite Amazon's endless ambition, the lofty valuation of AMZN stock is still difficult to justify longer-term, and Amazon will have to continue ramping up profitability rapidly for years to come in order to give shareholders bang for their buck. After what was by all major metrics a blowout second quarter, the sedated response from Wall Street shows just how high the bar is set.
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