Amazon just gave a glimpse of a much more profitable future

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There is no reason to bury the lede. Amazone (NASDAQ: AMZN) Just had its best quarter ever, posting record revenues and profits thanks to explosive growth as the company became essential during the pandemic. In the Q2 report, there were a number of signs pointing to a successful quarter for the tech giant, and Amazon delivered – and more.

Revenue jumped 40% in the quarter to $ 88.9 billion, driven by strong e-commerce demand around the world. That result easily exceeded the company’s own forecast for revenue growth of 18% to 28% and analysts’ estimates of a 28.6% increase to $ 81.5 billion. Amazon’s bottom line was even brighter: After forecasting near break-even operating profit for the second quarter, operating profit nearly doubled to $ 5.8 billion and earnings per share fell from $ 5.22 a year ago to $ 10.30, eclipsing the analyst. consensus at $ 1.46.

During the earnings call, management explained that the second quarter is historically the slowest time for retail sales, so the company was able to increase its excess processing capacity, which exists to support demand for the holiday season; this pushed the operating leverage higher.

However, what was particularly impressive about the result of the profit explosion was that it occurred despite the company’s spending of $ 4 billion in COVID-19-related expenses, including personal protective equipment, extra cleaning, higher wages for warehouse workers and investments in their own. test lab. Under normal circumstances, operating profit would have approached $ 10 billion in the quarter without these costs, assuming demand had been the same.

Management pointed out the unique conditions which led to monster profits as fixed costs were heavily tapped and the company saved in areas such as business travel, marketing and even healthcare. Still, it’s worth examining how Amazon was able to double its operating profits to record highs in a quarter it simply intended to stabilize.

International e-commerce is out of the red

For the first time in years, Amazon has made a profit in its international e-commerce business. The company has operated at a loss in the segment developing infrastructure in India and elsewhere and strengthening its Prime member base. It ended the quarter with a profit of $ 345 million, down from a loss of $ 601 million a year ago.

With much of the world facing the impact of the global pandemic, the international segment saw a comparable increase in sales in North America, up 38% to $ 22.7 billion, compared to an increase of 43 % on its domestic market.

This push helped improve operating leverage. Management highlighted particularly strong results in the UK, one of its largest markets outside the US

AWS has gained influence

Although revenue growth slowed in Amazon’s cloud computing division, Amazon Web Services, profits increased. AWS revenue increased 29% to $ 10.8 billion, while segment operating profit jumped 58% to $ 3.4 billion. AWS remains the company’s largest source of profit and a high-margin business that is expected to continue to increase the company’s overall profit margin over time.

During the call, management said the backlog for AWS, measured in revenue commitments, increased 65% from a year ago and 21% from last quarter, showing a strong demand for its cloud infrastructure service during the pandemic. Technology and content, a major component of AWS costs, grew only 15% to $ 10.4 billion, an example of the fixed costs the company operated in the quarter.

The economic divide is widening

Over the past few years, Amazon has gone from being a low-margin business to a profit machine. The emergence of AWS has been one component of this success, but the company’s ability to leverage its competitive advantages as a dominant e-commerce company may be an even bigger reason. For example, third-party sales, which exceeded direct sales in the quarter, tend to have a higher margin, as Amazon collects sales commissions and fulfillment fees while using the infrastructure already built. for first party sales. Advertising, which has also become a big business, works the same way.

Third-party vendor service revenues jumped 53% in the quarter to $ 18.2 billion, as the marketplace’s vendors also benefited from the pandemic, and its “other” category, mostly made up of advertising, saw a 41% growth in revenue to $ 4.2 billion. The strength of its advertising business is also remarkable considering the challenges other advertising-focused platforms faced in the second quarter.

And after

Management tried to lower expectations for earnings that remain so high, calling the quarter “very unusual,” and the third quarter forecast called for a more modest operating profit of $ 2-5 billion, with more than $ 5 billion. $ 2 billion in COVID-19 spending. On the top line, he forecast revenue growth of 24% to 33%. However, after the latest performance, investors probably shouldn’t take these forecasts too literally.

The second quarter results show the kind of profits Amazon is capable of making. While rising demand was essential, its ability to control its fixed costs and leverage its competitive advantages in areas like AWS and its third-party marketplace is also crucial. When the pandemic ends and demand normalizes, Amazon will be in a much stronger position, significantly bigger, and with less competition.

That extra strength can’t help but show up in the bottom line.



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