Amazon reassures | Morningstar

Amazon (“Wide Moat”) announced strong second quarter revenue and net income results that exceeded consensus expectations and provided an encouraging revenue outlook for the third quarter.

While AWS remains a tremendous opportunity and has performed well again, the most important takeaway from this quarter is that retail-related businesses, particularly third-party seller services, are coming back and even generating advantages over to our expectations.

We are not yet ready to claim victory, but we are encouraged by the results and note that the pandemic fueled growth spurt is now removed from prior year comparisons, so growth should optically improve at the future.

We maintain our fair value estimate of $192.

Attractive title

Even with stocks up 14% post-market, we continue to view stocks as attractive.

Second-quarter revenue increased 7% year-over-year, or 10% in constant currency, to $121.2 billion, versus guidance of $116 billion to $121 billion.

The unfavorable currency impact was 120 basis points worse than expected.

For perspective, the comparison last year was 27% growth, so still difficult.

The performance achieved shows a solid improvement.

Modest retail growth

In retail sales, online stores were down 3% year-on-year, brick-and-mortar stores improved 12%, third-party seller services increased 9%, and subscription services increased by 10%.

Increases in Prime membership fees and third-party seller fees contributed to revenue, while Prime member churn was better than expected.

Unit growth was 1%.

The two most critical segments, AWS and Advertising, grew 33% and 18%, respectively, over the prior year.

Compared to our model, third-party vendor services and AWS generated the greatest revenue outperformance.

AWS Leadership

AWS continues to drive Amazon’s overall revenue growth, with large transactions and longer engagements contributing significantly.

Backlog at AWS grew 65% year over year (vs. AWS revenue growth of 33%) and 13% sequentially as weighted average remaining life increased 3.9 years old.

We continue to believe that migrating to the public cloud is a huge opportunity and remains in the early stages of evolution, with AWS being the undisputed leader in this market.

Operating profit came in at $3.3 billion, versus negative guidance of $1.0 billion to $3.0 billion, producing an operating margin of 2.7%, versus 6 .8% a year ago.

Fuel Rise

The company is making progress on its overspending, particularly in improving the productivity of the fulfillment network, although inflationary pressures from fuel and ocean and air freight remain elevated.

These amounts totaled $4.0 billion this quarter and are expected to reach $2.5 billion in the next quarter, while the additional savings are expected to be reinvested into AWS (mostly).

Finally, Amazon suffered a $3.9 billion pretax loss on its investment in Rivian, whose shares were battered by the stock market selloff throughout the quarter.

Solid outlook

Amazon’s third-quarter outlook includes revenue of $125 billion to $130 billion and operating profit between breakeven and profit of $3.5 billion, compared to consensus estimates of $126.8 billion and $4.3 billion, respectively.

The second quarter outlook assumes 390 basis point pressure from currency effects, making the revenue forecast more impressive, and $2.5 billion in excess costs and moves Prime Day to the third quarter of this year, compared to the second quarter of last year.

Prime Day added about four growth points last year.

We believe that the sales and profitability outlook for the September quarter is good, after several disappointing quarters.

Cost pressures are easing, revenue comparison is easier and consumer demand is showing signs of relative health.

© Morningstar, 2022 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be considered an invitation or encouragement to buy or sell the securities listed. Any comment is the opinion of its author and should not be considered a personalized recommendation. The information in this document should not be the sole source for making an investment decision. Be sure to contact a financial adviser or finance professional before making any investment decisions.

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