[opendtv] Amazon.com Stock Slides on Lower Profitability | Fox Business
- From: Craig Birkmaier <brewmastercraig@xxxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Sun, 06 Aug 2017 07:28:01 -0400
In a related article, maybe investors are starting to question the viability of
"profitless" businesses...
Amazon right now, even after getting knocked down, it's still worth almost
$500 billion. That's a huge amount of money for a company that, last quarter,
earned a little over $600 million in profit. It's a very small operating
profit relative to what the company is worth. You have to be betting on this
company's growth not for the next few years, but for the next few decades to
be a long-term Amazon shareholder.
Regards
Craig
http://www.foxbusiness.com/markets/2017/08/05/amazon-com-stock-slides-on-lower-profitability.html
Amazon.com Stock Slides on Lower Profitability
Published August 05, 2017
Profitability finally seemed to be turning a corner at Amazon.com (NASDAQ:
AMZN) in 2016, following years of low margin. However, Amazon's recent
second-quarter earnings report dashed bulls' hopes of steady profit growth.
While revenue jumped 25% year over year, operating profit plunged by 51%.
In this episode of Industry Focus: Consumer Goods , the team drills down on the
reasons Amazon's profitability came under pressure last quarter. Amazon is
investing as aggressively as ever to keep sales growing. For long-term
investors who believe in Jeff Bezos' vision, there's no reason to be worried
about this decline in Amazon's margin performance.
A full transcript follows the video.
This video was recorded on Aug. 1, 2017.
Vincent Shen: Some other big news we wanted to cover from last week was Amazon
earnings. I feel like this usually runs in Dylan's wheelhouse on the Tech show,
but we're going to talk about the e-commerce giant's latest results and use
them to segue into some related topics. Amazon's stock has been beaten up a
little bit since releasing earnings. What did the company report to get a
bearish response?
Adam Levine-Weinberg: On the sales front, Amazon is still chugging along. They
had good growth last quarter. Revenue was up about 25% year over year. That's
really good. Amazon has definitely managed to keep its growth rate steady or
even increasing despite being now more than a $100 billion revenue company.
That's really rare and extremely impressive. What caused the stock to fall is
that their operating income is coming under pressure again. That's definitely
an area of some concern for investors, because Amazon, obviously, for many
years was barely profitable. It was actually losing money. Investors accepted
that because they were growing. It seems, a couple of years ago, that with the
growth of Amazon Web Services, which has pretty high margins, that Amazon was
finally getting to be steadily profitable, was on a long-term earnings growth
trajectory where they would be growing revenue very quickly as well, but also
increasing their margins year after year. That story just broke down last
quarter.
Just a look at the numbers. While sales reached $38 billion, up 25%, operating
income plunged more than 50% year over year last quarter, down to $628 million.
And actually, if you look and break that down by segment, more than 100% of
that operating profit came from Amazon Web Services. So the retail business as
a whole, which is still the vast majority of Amazon's sales, was unprofitable
last quarter. And some of that is foreign currency. They've certainly been hit
hard, as other retailers have, by the strong dollar in their international
operations, which are losing money right now. And even in North America, you're
seeing a lot of growth initiatives that are keeping sales growth at such a high
rate, they are having an impact on the profitability. Two of the ones I would
call out are first their investments in video, on Prime Instant Video.
Shen: On content.
Levine-Weinberg: A great driver, it's a reason why the Prime membership program
is growing so quickly, because they offer all of these side benefits aside from
the free shipping that Prime became known for. But that's really expensive, and
you're basically putting money in there where you're not getting a direct
return for that investment, because it's just included as an add-on once you
buy the Prime subscription. So I'm sure it drives some incremental revenue for
Prime, but the main reason why people sign up for Prime is to get the free
shipping. So the real benefit for Amazon is, as you can keep people loyal to
the Prime program, they should start spending more and more money Amazon.com.
The other thing I would call out is, you have their Prime Now same-day
delivery. That's obviously really expensive compared to even two-day shipping,
because when you have warehouses all over the country, you can use regular
ground shipping to get an item to somebody within a day or two; whereas if you
need to get it there in two hours, then all of the sudden you need to have a
special courier network and warehouses that are very centrally located to get
the items out to customers. That's obviously very expensive, and Amazon hopes
to drive down that per-unit cost of delivery over time primarily just by
increasing its scale. The more deliveries you're doing, the lower the cost per
drop off. But that's going to take a while to get that to a cost that's really
affordable for Amazon. So for now, that's definitely dragging on that
profitability in North America.
Shen: The big takeaway that you will often see now in their quarterly reports,
the AWS business continues to subsidize the retail segment, especially, you
mentioned on the international side, as they try to expand out that business,
too, there's going to be rising costs with that. But even, as you mentioned,
the gem that AWS generally is, did see lower profitability and costs rising
across the company. I think that's ultimately why Wall Street analysts and the
market's response in general was a bit more bearish. I still find this reaction
to the report interesting. You mentioned that, for years, Jeff Bezos has been
growing the company, and he's been doing so at the expense of the bottom line.
He really doesn't make a secret of that. The stock has done incredibly well,
it's marched higher and higher, and then you have this one somewhat
underwhelming report, that enough investors get shaken to push the shares down
6% to 7%. But at this point, I feel like you have to have this faith in Bezos
and his long-term vision and strategy to even be a shareholder in the company.
Levine-Weinberg: I think that's absolutely true. Amazon right now, even after
getting knocked down, it's still worth almost $500 billion. That's a huge
amount of money for a company that, last quarter, earned a little over $600
million in profit. It's a very small operating profit relative to what the
company is worth. You have to be betting on this company's growth not for the
next few years, but for the next few decades to be a long-term Amazon
shareholder.
Adam Levine-Weinberg has no position in any stocks mentioned. Vincent Shen has
no position in any stocks mentioned. The Motley Fool owns shares of and
recommends Amazon. The Motley Fool has a disclosure policy .
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