Amazon Q2 profit example: strong growth but rising costs will damage profit

Reports Q2 2020 results on Thursday, July 30 after closing
Revenue forecast: $ 81.09 billion
EPS expectation: $ 1.38

Investors in the e-commerce powerhouse (NASDAQ 🙂 are particularly concerned today. The company's business model is perfectly positioned to further expand its e-tail dominance as the global COVID-19 pandemic continues to flare up.

Given the need to distance themselves and in many cases stay at home, more and more people are making purchases online.

That strength will be seen when the Seattle-based company reports its second quarter earnings. The release is likely to show sales growth of 28% compared to a year ago.

Expectations of explosive growth have led to a massive increase in Amazon shares, which have risen 62% this year. The stock closed at $ 3,000.33 yesterday, slightly below its record high.

While Amazon's online marketplaces generate most of the company's revenue, it is not the most profitable segment. Amazon is also the world's largest cloud infrastructure provider, with Amazon Web Services (AWS) generating most of the profit.

In addition, AWS is a high-margin company that enables Amazon to provide cash to develop and expand its market strategies, including aggressive promotions and low-cost hardware devices. The unit delivered a 33% revenue increase in Q1 and is likely to show strong performance again as companies move their data to servers provided by Amazon.

Along with these very favorable growing conditions, the costs of Amazon are also rising. The company has already warned investors that the second quarter will be tough when it comes to showing profitability as it increases spending to make logistics operations run smoothly during the corona virus pandemic.

"Under normal circumstances, in the upcoming Q2, we expect operating profit of approximately $ 4 billion or more," said Jeff Bezos, CEO of Amazon, in April.

"But these are not normal circumstances. Instead, we expect to spend all that $ 4 billion, and maybe a little more, on Covid-related expenses to get products to customers and protect workers."

Big competitive advantage

Escalating costs shouldn't worry the company's long-term investors, however. Bezos has a good track record of producing results by investing in new data centers and warehouses to expand its e-commerce capacity.

These bets have paid off in the past, enhancing the company's broad competitive edge in e-commerce.

Bezos is also opening a number of new growth areas that go beyond selling goods online with low margins. Amazon's digital advertising company, another high-margin company, is growing three-fold.

Supported by these highly profitable units, Amazon has been able to disrupt many industries and continue to do so for a long time.

The company also has a hardware unit that produces a wider line of smart speakers and video streaming gadgets. The Amazon Studios division creates original television shows and movies and is starting to challenge Netflix (NASDAQ 🙂 and HBO (NYSE :).

As far as physical retail space is concerned, Amazon did not vote secretly about its ambitions in that arena either. It acquired the Whole Foods Market grocery store in 2017 and is now expanding a fleet of cashier-free convenience stores. profit report. Nevertheless, sales should continue to grow.

For long-term investors, any temporary setback should be a buying opportunity in the Amazon share, which is a good bet to take advantage of global digitization.

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