[ad_1]
Amazon.com (NASDAQ: AMZN) the stock fell after the company released its second quarter results on July 29. Investors were disappointed with slower revenue growth and management’s outlook, which includes an even more significant slowdown in the third quarter.
But if you look at what’s really going on at Amazon, there are plenty of reasons to be optimistic about the company’s long-term revenue and profit growth. That’s why I picked up some more FAANG shares after the sale.
Image source: Amazon.com.
A Sneak Peek at Amazon Q2 Revenue Under the Hood
Amazon breaks its revenue down into six segments as part of its supplemental reports each quarter. Here is the revenue growth for each segment over the past five quarters adjusted for currency changes.
|
Segment |
Q2 2020 |
Q3 2020 |
Q4 2020 |
Q1 2021 |
Q2 2021 |
|---|---|---|---|---|---|
|
Online stores |
49% |
37% |
43% |
41% |
13% |
|
Physical stores |
(13%) |
(ten%) |
(7%) |
(16%) |
ten% |
|
Third-party vendor services |
53% |
53% |
54% |
60% |
34% |
|
Subscription services |
30% |
32% |
34% |
34% |
28% |
|
Amazon Web Services |
29% |
29% |
28% |
32% |
37% |
|
Other |
41% |
49% |
64% |
73% |
83% |
Data source: Amazon second quarter earnings report. Table by author.
The above table emerges clearly. In the upper right corner, you can see the online store sales growth slowed down to just 13%. This underperformance is the only reason Amazon fell short of analysts’ expectations for revenue growth in the last quarter.
Meanwhile, Amazon’s top-grossing segments – AWS and others, which are primarily made up of advertising – have actually seen their revenue growth accelerate. Third-party vendor services have held up well, growing by 34%, which is actually faster than their pre-pandemic growth rate. And the growth of subscription services has remained stable throughout the past year.
All of this means that despite slower short-term revenue growth, the most profitable segments are a significant contributor to that growth. As a result, Amazon should ultimately see good results even if the top result does not meet expectations.
Amazon is in the middle of an investment cycle
True to form, Amazon won’t let the bottom line swell too much. It began to accelerate building its execution capacity in 2019 with the introduction of the One-Day Prime Expedition, and the pandemic has only added fuel to that effort.
“This is all part of a multi-year investment cycle for us,” CFO Brian Olsavsky said on the company’s second quarter earnings conference call. “Unit volumes, while obviously increasing at lower rates than the large mix last year, continue to remain high, and we are seeing strong demand for FBA sellers and third-party sellers. “
It also takes a while for Amazon to ramp up the capacity of newly opened fulfillment centers, so after nearly doubling its footprint in the past 18 months, it has some catching up to do. Olsavsky says one-day delivery is still lower than the rate seen before the pandemic.
As Amazon increases capacity, sales from online stores and third-party services, both of which decelerated sharply in the second quarter, are expected to return to faster growth.
Plus, if Amazon ever lifts its foot from the pedal and maximizes its full capacity, last year’s results show just how profitable it can be to leverage the distribution network. It posted record operating profit margins last year despite spending billions of dollars in expenses related to COVID-19. This is why the outlook for management’s operating margin contraction in the third quarter does not worry me.
On top of that, as the distribution network expands (including the opening of the airline hub this year), Amazon can leverage its network to deliver more items on its own instead of relying on retailers. third. Eventually, Amazon Logistics could become another profitable business unit for the company.
A good opportunity
Amazon’s stock price is still down 7% since the release of its second quarter results. I took the opportunity to buy some stocks, as the long-term trends in e-commerce, cloud computing and digital advertising are still well intact, and Amazon is the leader in all three categories.
A closer look at the results shows that the weakness is confined to Amazon’s proprietary retail operations. This is acceptable to me given the events of the past year and the effect they have had on Amazon’s business. In addition, the company is investing in its future with the expectation that the demand for its retail operations will continue to increase significantly over the next few years. Management has a lot more information about their clients than I do, so they’re probably on to something.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
[ad_2]
Source link
