Amazon With All Guns Blazing

It has been a busy quarter for Amazon (NASDAQ: AMZN). Earlier last month, Amazon announced a $14 billion acquisition of high-end grocery store Whole Foods. It was a surprising addition for the company, and its biggest one to date. But, first the earnings, which missed analyst expectations and sent the stock below its $1,000 milestone.

Amazon’s Financials

Amazon’s second quarter revenues grew 25% over the year to $37.8 billion, ahead of the market’s expectations of $37.2 billion. EPS of $0.40 was significantly short of the Street’s forecast of $1.41 per share, reiterating the fact that Amazon continues to prefer revenue growth over margins.

Its operating margins fell from 4.2% a year ago to 1.7% in the quarter and net income fell a significant 77% over the year to $197 million. The declining margins are attributed to rising spend on fulfillment and the development of technology and content. Fulfillment expenses grew 33% to $5.16 billion and technology and content spend grew 43% to $5.55 billion.

By segment, net product sales increased 17% to $24.74 billion and net service sales increased 42% to $13.21 billion. Amazon did not break out the details on cloud sales, but did mention that AWS continued to drive profitability and saw revenues grow 42% over the year to $4.1 billion. Analysts estimate that subscription sales for Amazon, including Prime fees rose 51% in the quarter to $2.2 billion.

For the current quarter, Amazon forecast sales between $39.25-$41.75 billion with an operating income (loss) between $(400) million-$300 million. The forecast is in line with the expectations.

Amazon’s Growth

Amazon continued to spend across multiple initiatives. During the quarter, it promoted its third annual Prime Day. This was the biggest global shopping event ever for Amazon. The company recorded sales of more than 40 million units in a single day with Amazon’s own Echo Dot becoming the best-selling product.

Amazon did not give out details on its Prime membership. It did state that Prime Day sales were driven by new Prime members joining Prime on the day. It was the biggest addition to Prime subscribers that Amazon has seen in any single day in its history. It continued to expand Prime internationally and launched Prime Now in Singapore to allow customers to get free two-hour delivery on goods.

Within video content, Amazon Studios released The Big Sick in theaters nationwide to positive reviews. Its video services received 16 Emmy nominations, still a far cry from the 91 received by Netflix. The company continues to add content and will premiere new Original Series and Movies including titles like The Last Tycoon, The Tick, The Marvelous Mrs. Maisel, Last Flag Flying, Wonderstruck, and Wonder Wheel. It is also catering to the regional content and launched its first Indian Amazon Original Inside Edge. The series is available in over 200 countries worldwide. It launched channels in the UK, Germany, and Austria, so that subscribers in these regions will be able to subscribe to live and on-demand TV channels.

Within hardware, Amazon introduced Echo Show, a new Echo device that provides access to Alexa with a video screen. Users can now ask and view scores from games, video clips, and even music lyrics on Amazon Music. The device will also be able to connect the users with family and friends through video calling and messaging.

It introduced new Alexa smart home capabilities that will allow Alexa to control entertainment devices like televisions, connected speakers, and remotes and even control smart devices like Roomba vacuum cleaners.

For the Cloud segment, AWS announced new infrastructure expansions planned for Hong Kong and the US in the next year. It also announced the general availability of AWS Greengrass, a software that allows customers to run AWS compute, messaging, data caching, and sync capabilities on connected devices.

Amazon’s Acquisition

The elephant in the room though was Amazon’s $13.6 billion acquisition of grocery chain Whole Foods. And Amazon, typical to its style, disclosed very little about the acquisition, besides saying that the addition will help expand its offerings in consumables and grocery. But besides the growth in these categories, Amazon will benefit from Whole Foods’ logistics capabilities and access to more than 400 retail locations. The acquisition will help Amazon compete more strongly against brick-and-mortar retailers, especially Walmart. Many believe that within retail, the only true competition that Amazon faces is from Walmart.

Walmart has the scale and funds to take on Amazon, and has been expanding its online presence with the acquisition of Jet.com and Bonobos. Walmart has also been improving its online service with the addition of free two day shipping on items – without the need to pay for a subscription to a Prime like service.

The acquisition is still to receive the regulatory go-ahead. And, one will have to watch out how Amazon plays the acquisition. But it is worth noting that this was the biggest acquisition that Amazon has ever made. TechCrunch’s infographic offers an interesting view into the value of the acquisition.

Earlier in the year, Amazon had acquired Middle Eastern e-commerce vendor Souq.com for an estimated $650 million. Souq.com was a leading e-commerce company in the Middle East that features more than 1 million products across 31 categories such as consumer electronics, fashion, health and beauty, household goods, baby clothes, watches, and perfumes. It had over 45 million visits per month and operated both as a retail site and as a marketplace for third party sellers. The company had joined the Billion Dollar Unicorn Club last year.

It is also rumored that Amazon is still scouting for more acquisitions. It is rumored to be looking at Slack and Spotify to expand its cloud and content offerings. While Amazon did not validate the rumors, analysts believe that they may well be true considering that the company has nearly $13 billion in cash and cash equivalents and has seen significant improvement in cash generation. For the twelve month period ending June this year, Amazon generated $9.7 billion in free cash flow compared with $1.04 billion generated a year ago.

Its stock is trading at $996.19 with a market capitalization of $478.5 billion. It touched a record high of $1083.31 earlier this month. The stock has been rising from the year low of $710.10 it had fallen to in November last year.

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Photo credit: simone.brunozzi/Flickr.com.