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Thursday, September 29, 2022


AMZN Drops Then Jumps After Smashing Earnings, AWS, But Missing On Revenue, Guiding Lower

Courtesy of Zero Hedge

Amazon appears to have done it again, and just dramatic collapses by half the FANGs – FaceBook and Netflix – and shortly after the latest tweet from Trump suggested the president could crack down on the world’s biggest online retailer, AMZN is back to its short-crushing ways, reporting EPS which smashed expectations, even as it missed on revenue while guiding well below consensus.

In kneejerk response, the stock initially tumbled as much as 5% before spiking higher.

Here are the details from Amazon’s just concluded second quarter

  • EPS $5.07, blowing away estimates of $2.49, and above the highest forecast (range $1.53 to $3.09). A key reason for this is a plunge in the company’s tax rate, which dropped to only 2.8%.
  • Operating income was $2.98 billion, also far above the estimate $1.71 billion (range $1.31 billion to $1.95 billion);
  • However Revenue was “only” $52.9BN, below the estimated $53.35BN (range $52.52BN to $54.09BN). Still, the revenue was squarely inside the company’s Q1 guidance of $51-$54BN.

More importantly, Amazon guided Q3 net sales to be between $54.0 billion and $57.5 billion (up 23%-31% vs Q3 2017), which however was below the consensus est. $58.03B (range $55.63 billion to $59.77 billion).

Amazon also guided operating income to be between $1.4 billion and $2.4 billion, compared with $347 million in third quarter 2017. As Bloomberg notes, the guidance implies 3.4% operating margin, the highest reported for 3Q in seven years. 3Q margin is usually lower due to preparation for 4Q and Prime Day.

Looking at Amazon’s most important segment, AWS, in Q2 it generated net sales of $6.11 billion, an increase of +49% Y/Y. By comparison, in Q1 AWS generated $5.44 billion in revenue, which also grew at a 49% rate.  Here is the historical growth rate of AWS:

On the bottom line, AWS was responsible for operating income of $1.642BN, or a 26.9% profit margin, up from 25.8% last quarter. In other words, for yet another quarter, AWS was responsible for more than half, or 55% of Amazon’s total operating income.

Looking at Amazon Prime, which Amazon lists under “Subscription services revenues” it hit $3.4Billion, rising 55% (ex FX), slightly below the 56% growth rate in Q1 but above the 53% in Q2 2017.

Amazon’s new highly profitable advertising business grew 129%, slightly down from last quarter’s 132% growth, but still a scorching rate of growth.

As Bloomberg notes, “investors are perplexed by Amazon’s results, with shares teetering in positive and negative territory in after-market trading. The outlook on revenue and guidance missed. But revenue growth from Amazon Web Services and advertising both were strong.”

Investors have grown to expect strong revenue gains from Amazon, with their primary concern being how quickly the company spends it on new businesses and projects.

Jeff Bezos was not concerned, however, and as usual he was quite optimistic, and one quarter after focuing on AWS, this time he pitched Alexa:

“We want customers to be able to use Alexa wherever they are,” Bezos said. “There are now tens of thousands of developers across more than 150 countries building new devices using the Alexa Voice Service, and the number of Alexa-enabled devices has more than tripled in the past year. Our partners are creating a wide variety of new Alexa-enabled devices and experiences, including soundbars from Polk and Sonos; headphones from Jabra; smart home devices from ecobee and First Alert; Windows 10 PCs from Acer, HP, and Lenovo; and cars from automakers including BMW, Ford, and Toyota.””

For those still concerned about AMZN’s cash burn, the company reported LTM Free Cash Flow in Q2 of just over $10.4 billion, a fraction away from an all time high.

Perhaps even more impressive is that after sliding in early 2017, Amazon’s operating margin has soared in the past three quarters, largely as a result of AWS, and just hit the highest number on record.

Clearly, this means that the company’s LTM operating margin is soaring, after dropping modestly in early/mid 2017:

What is somewhat surprising is that after constantly growing its workforce for years, in Q1 AMZN’s total employees posted a modest decline, dropping from 566K to 563.1K, even as global net sales growth rose to 39% in Q1 from 36%.

In kneejerk response, the stock initially tumbled as much as 5% on the revenue miss and the poor guidance, but it has since rebounded – while modestly fading gains – on the back of continued strength in AWS growth and rising profit. This is hardly as surprise: Amazon shares have risen post earnings for the past three quarters (they fell on disappointing 2017 Q2 results). The biggest jump came after 2017 Q3 earnings when shares spiked more than 13% according to Bloomberg. Since then shares climb around 3% in reaction to earnings.

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