Historical. I think that’s the best way to describe Amazon’s second quarter result (AMZN), given the extent of the disruption to business (and life in general) from COVID-19 in 2020.
Big Tech’s Super Thursday was more of a mic drop than anything else. Take Amazon. The Seattle-based e-commerce and cloud giant generated what was by far the highest revenue and profit in the company’s history.
Revenue growth of over 40% had only been seen once in the past five years, when Amazon was a much smaller company. EPS of $ 10.30 landed in a different dimension compared to the company’s forecast, offered three months ago, which called for a mid-term break-even.
Credit: The Verge
Happy Seattle Vacation
In my overview of the results, I predicted that Amazon’s ecommerce business would benefit from (1) resilient digital sales, in general, which had been strong in the second quarter, even when the retail space in as a whole was struggling and (2) gaining market share. The numbers confirmed my expectations, albeit on a much larger scale.
Second-quarter sales in North America were not only 43% higher year-on-year, but they even exceeded last year’s holiday figures. Strength was not limited to a single sub-segment. For example, Amazon’s online store, third-party business, and subscription revenue grew at a rate of at least 29% each, which is impressive considering that all of North America has only grown. than 20% over the same period last year. The company benefited from an unusual combination of sustainable and high demand for groceries and consumables which saw a strong recovery in hardlines and softlines.
See the multi-year trend below. Note that, although sales for the first half of 2020 benefited from the stay-at-home economy in North America, the favorable trend for e-commerce (orange line) has been strengthening since early 2019. I believe that the “ Sticky ‘The Prime model can be widely credited for improvement over the past four to six quarters.
Source: DM Martins Research, using data from several company reports
Also, in line with my expectations, Web Services experienced the same challenges (to the extent that we can call that a 29% growth) at Microsoft (MSFT) last week. It looks like the resumption of cloud adoption really was a story in the first quarter, and investment has slowed down as some companies begin to face uncertainty, at least, about their IT budgets.
The best news is that the 58% increase in AWS operating profit was well above the pace of revenue growth. This was probably the case due to the drop in costs, including travel and other overheads, which I believe are temporary. I believe that the negative impact of COVID-19 on the opex must have been felt disproportionately by Amazon’s e-commerce activity.
The stock is moving forward
I understand, this market looks a bit foamy given the macroeconomic circumstances – although I do not subscribe to the argument that tech enthusiasm in 2020 is akin to that of 1999. As far as stock action is concerned Amazon and its valuations, first glance The reaction to the headline numbers must be shock and disbelief that these levels can be held for much longer.
But first, I would ask a question that is sure to cringe value investors: what fair assessment should be given to the global dominance of e-commerce and the cloud (to some extent) that does not has no end in sight? Is 81x next year’s earnings still high enough? Let’s not forget that Amazon continues to disrupt, or at least become a relevant participant in “side gigs” that include groceries, tech devices, streaming services – and the list could go on and on. lengthen.
Second, assuming that Amazon will remain the powerhouse it is today for at least five years (I’d bet much longer, in the absence of extensive government intervention), revenues and profits should meet current ratings. Keep in mind that (1) all of Amazon’s major segments grew at a rate greater than 20%, despite their scale, and (2) the history of margin expansion on the ecommerce side, in especially outside the home continent of Amazon, has not even started to unfold.
That being the case, I think “Amazon’s $ 2 trillion” (in market capitalization) is not a matter of if, but when. And while it’s hard to pin down the timing in this case, especially given all the uncertainty at the macro level, I think this stock can climb 25% and hit the mark sooner than many think.
I believe long-term growth investors who pull out and accept AMZN due to valuation fears do so at their peril.
Beat the market a mile
Amazon and Microsoft have been key contributors to the returns of my All-Equities Storm-Resistant Growth since inception. But other mega-cap names produced an even bigger chunk of the portfolio’s gains, which were better than the one-mile S&P 500 (see chart below, pink line).
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Disclosure: I am / we have been AMZN, MSFT for a long time. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose action is mentioned in this article.