Amazon – When Ukraine’s Not Enough

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Amazon (NASDAQ:AMZN)’s second quarter sales came in at $113.1bn, up 24% year-on-year once currency movements are ruled out. However, that was lower than the $115.2bn analysts had hoped for. Operating profits came in at $7.7bn, up 32.8% but again slightly behind analyst expectations.

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The group reported strong growth across all three of its operating segments. North American sales rose 21% to $67.6bn, while operating profits of $3.1bn were up 47%. International reported sales of $30.7bn and operating income of $362m, up 26% and 5% respectively. Amazon Web Services (AWS) reported sales of $14.8bn, up 37%, and operating income of $4.2bn, up 25%.

Operating costs rose 26.9% to $105.4bn, led by Marketing and Technology & Content costs – which rose 73.2% and 33.5% respectively. Capital expenditure hit $14.3bn, up from $7.5bn.

Increased capital expenditure as well as changes to working capital meant the internet giant reported a free cash outflow for the quarter of $1.6bn, compared to a $13.1bn inflow a year ago. The group finished the quarter with net cash of $39.6bn, down from $52.6bn at the start of the year.

Third quarter sales are expected to be between $106bn and $112bn, between 10% and 16% ahead of the same quarter last year. Operating income is expected to be between $2.5bn and $6.0bn.

Amazon shares fell 6.4% in early trading.

Amazon's Quarterly Sales

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“It’s saying something when you can report quarterly sales roughly equal to the annual GDP of Ukraine and 33% operating profit growth and still disappoint the market. You can see why Jeff Bezos would rather be jetting off into space.

In all seriousness though, Amazon is increasingly bumping up against the law of large numbers – particularly in US retail. When you’re only selling $1,000 of product a year, boosting sales by 40% is easy. When your annualised sales reach $400bn, finding an extra $160bn of sales is pretty difficult. It means Amazon’s having to spend big to deliver future growth, and capital expenditure is soaring, moving the group to a free cash outflow for the first time in a while.

To be fair to Amazon there are considerable coronavirus related costs weighing on performance at the moment. And growth in service revenues, up 37% this quarter, have the potential to move profits faster than they move revenues – particularly marketing which we suspect is incredibly high margin. The group’s got plenty of irons in the fire for the future, it just needs to hope one of them comes off big.”

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