Investing and stock trading require a good deal of forward and in-depth thinking. This is particularly essential when it comes to analyzing the situation online retail giant Amazon (AMZN) is in.
Amazon is currently experiencing a profit slump. But that’s because Amazon is expanding rapidly into various segments, catering to new shopping categories, and exploring new markets and new countries. All this expansion draws up investment and, while revenue has increased, the expenses involved in this expansion have brought the profits down.
Amazon’s Quarterly Income Declines
Amazon’s Q2 revenue was $38 billion, a 25% rise from the previous year. This kind of revenue hike is something many brick-and-mortar retail giants haven’t been able to dream about. In spite of that, there was actually a 77% decline in quarterly income.
But Amazon is unfazed, even reporting that operating profit in the present quarter could decrease by up to $400 million. That is an indication of Amazon’s continued desire for heavy investment so that it can increase its retail dominance. Things are tough in retail with margins thin across the industry. But Amazon has longer term success as its objective and, the online retail giant reckons expansion to be the way to move ahead.
Massive Investment Made in Core Retail Business
In terms of retail, Amazon has invested in faster shipping and is continuing to invest in it with the Amazon Prime membership scheme. With faster shipping, Prime members also get video content. In fact, the video content has been a major contributor to enabling Amazon to retain its Prime subscribers. It also helps lure the free trial members for signing up for the paid Prime plans. Sure enough, sales of Prime subscription increased by 51% to $2.2 billion in Q2.
By the end of 2017, analysts estimate that over 50% of households in the US will have Prime membership. If such an astronomic growth is maintained, it won’t take long for the country to be saturated with Amazon Prime subscriptions. And once a Prime member, Amazon encourages you to buy more.
Shares Peak in Early Hours and Fall in After-hours
Amazon shares peeked at a record high of $1,083.31 in the early part of Thursday, July 27, and at that point CEO Jeff Bezos became the richest person in the world. But that rise was brief. In after-hours trading, shares then had a 3.2% fall to $1,012.68. Its earnings per share were only 40 cents, below analysts’ expectation of $1.42 per share. Shares had been up close to 40% this year.
Amazon’s All-conquering Growth Continues
Amazon’s growth has been extraordinary. It started from being an online bookseller, but has now moved into almost every area of retail including segments people thought would never work with online retail. Physical retailers never expected Amazon’s online retail concept would make an impact in electronics and apparel. But that’s exactly where Amazon has branched into – apparel, appliances and now even groceries since $AMZN revealed it is going to spend $13.7 billion to acquire Whole Foods Market Inc. The deal is pending regulatory approval.
Amazon has also announced the Prime Now two-hour delivery service in Singapore. It announced earlier in the year it would acquire Souq.com, the Dubai-based online retailer in order to become a major force in the Middle East market. It has expressed its commitment to invest $5 billion in its India operations as well. It’s easy to see that the online retail giant wants to strengthen its presence in Asia and dominate the region like it’s dominated the United States.
Further Investment Results in G&A Plus Operating Costs Rising
Amazon predicted an operating income hovering between $300 million and a $400 million loss for the present quarter. This is excluding the Whole Foods deal. Analysts had an expectation of $931 million. According to an analyst, companies of the stature of Amazon usually increase their expenses at a rate that’s slower than their revenues. For Amazon, general and administrative costs (G&A) have been up 50% in Q2 which is mind-blowing. There was a 28.2% increase in operating expenses that touched $37.33 billion in Q2 that ended June 30. Fulfillment, technology and marketing costs also rose.
Analysts Maintain Long Term Positivity of AMZN
While analysts acknowledged the mixed nature of the profit margin, they also felt that the long term view is positive since there is growth in the company’s core retail business and reasonably steady growth in Amazon Web Services, whose sales rose 42% to top $4.1 billion.
Overall, Amazon has great plans for conquest and market dominance. So analysts admit things aren’t just like what the headlines say.
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