The Seattle based e-commerce major Amazon (AMZN, Financial) came out with its fiscal 2014 second quarter earnings on July 24, and reported not up to scratch numbers. Lower than expected performance for the quarter wasn’t received well by the Wall Street and the stock slid 10% in the after-hours trading. Even jokes about how Amazon can deliver everything but profits have started circulating. But, is the situation really that bad? Here’s how Amazon’s quarter was and what went wrong.
Not up to scratch numbers from Amazon
What investors seek in a stock is good returns and for this it’s a must for the bottom line to be robust. Making a lot of money by selling products, but not being able to translate that into profits isn’t an investor’s dream, let alone losing money. That’s exactly the situation with Amazon – revenues and net income are moving in exact opposite directions. The company had a great quarter in terms of revenue generation, but the widening net loss did all the damage.
For the three months ended, the company reported revenues of $19.34 billion, translating into a year or year improvement of 23%, meeting street expectations. Its operating costs also witnessed some increase as marketing costs went up by as much as 40% and Amazon fulfilled order cost surged 30%, resulting in an operating loss of $15 million against last year’s profit of $79 million. Finally, moving on to the bottom line, the online shopping giant reported net loss of $126 million, up from prior year period’s net loss of $7 million. For the quarter, EPS came to negative $0.27.
Amazon’s performance during the quarter has left analysts and industry experts asking what went wrong. Despite a better than decent revenue growth, the bottom line is in the red and the loss figure keeps rising over time.
Things that went wrong – The right kind of wrong?
Something went wrong. That’s for sure. The company ended up spending way more than it should have if it wanted a green bottom line. But, I feel these wrongs are the right kind of wrongs – something that Amazon had to do despite knowing the consequences.
The e-commerce major is building its future. Recently the company spent millions in developing and commercializing the Fire Smartphone – something the company believes to be crucial to its growth as an e-commerce player. These are several costs associated with the offering also. The customers who have opted to buy the device will be getting a full year subscription of Prime at no additional cost. This is an opportunity loss of the company. But, Amazon knows it’s worth it as these prime customers have the potential to contribute massively to the company’s profits. For the current quarter, Amazon now expects to report operating loss ranging between $410 million and $810 million.
Despite these guidance numbers, several analysts are optimistic about the long-term growth prospects of the company. Out of 44 analysts covering the stock, 13 believe AMZN is a strong buy, another 20 have buy ratings, and 11 have hold ratings – not a single analyst had underperform or sell ratings. Now that tells something about the company.
There is a very interesting aspect of Amazon’s Q2. During the quarter the company spent as much as $4.3 billion in capital expenditures and still managed to report free cash flows worth $1 billion. Even the revenue from the web service (AWS) segment showed promising growth. CEO Jeff Bezoz believes one day the segment can overshadow the retail segment revenue and claim the place of the top contributor.
Departing Thoughts
It’s not always a bad thing if a company’s efforts are not getting reflected in its profits. Some things take time and there are situations where a little sacrifice is required today to earn better yields in the future. Amazon is investing in the future of e-commerce and that’s bound to pay off. Looking at Amazon’s part, it can be said that the company deserves some amount of faith from its investors. It has come a long way since selling just books, and still has a long way to travel. The company’s plans are ambitious and practical. It’s only a matter of time before the shareholders are treated with huge returns.
