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Suravi Thacker
Suravi Thacker
Articles (157) 

Should Amazon Bring Profits For Investors, Despite Its Losses?

August 11, 2014 | About:

Amazon (NASDAQ:AMZN), the largest online retailer, has always given an impression that it is growing largely. Yes, it has been expanding its reach into new markets and bringing in new products in order to grow. However, its results have always been in the dark, with very little light on the details. Its recently reported second quarter results were not an exception. The numbers were mixed, with earnings far below analysts’ expectations, enabling its share prices to fall. Let us dig into the details.

The hits and the misses

Revenue for the quarter surged 23% to $19.34 billion, as compared to last year’s quarter. The top line did exactly meet the analysts’ expectations. The retailer’s core product sales contributed to the growth. Core product sales grew by 19.6% to $15.25 billion, over last year.

Further, sales of core products were driven by everyday retail items, promoted heavily by Amazon, and the company owned Fire and Kindle series devices. For instance, the launch of Fire TV in April was one of the key drivers during the period.

Also, services revenue was a bright spot, which surged 38.5% to $4.1 billion. The segment includes Amazon Web Services (AWS), the retailer’s best performing category. In fact, AWS registered a usage increase of 90% over the prior year’s quarter. This is also because the company cut the prices for its Web Services by 28% to 51%.

In fact, Amazon has also reduced its membership fee, which hurt its bottom line as well as its margins badly. The bottom line dropped to a loss of $0.27 per share, as compared to $0.02 per share, in the previous year’s quarter. This was significantly below the estimate of $0.15 per share.

A host of efforts

Amazon made a number of efforts to attract customers and in turn boost its revenue. The efforts included the launch of Fire TV, a set-top box that has parental controls along with FreeTime. FreeTime provides a better experience for the kids, wherein they can make character searches and pick up content of their own. It also provides an option to set time limits for type of content.

Also, it introduced the Kindle Unlimited, an unlimited eBook subscription service. The subscription service provides customers access to 600,000 Kindle books and many audio books for just $9.99 per month.

Further, the company launched Prime Music, which offers unlimited and ad-free access to millions of songs, only to the Prime members, for free. This indeed gained a lot of popularity among the customers.

In fact, the online behemoth’s efforts are not limited to these introductions. It has also enhanced its services, by providing same-day delivery of groceries, offering deliveries on Sundays also in 25% of America. Additionally, it has created three TV series for kids and has recently launched its new smartphone. The smartphone is priced in comparison to Apple’s iPhone and Samsung Galaxy S5.

Key takeaway

These initiatives, together with the new launches, make Amazon an interesting bet for the long term. The retailer is making all the efforts to continue its journey to success. However, its weak guidance, which estimates widening loss in the coming quarter, made investors unhappy. Moreover, it does not provide a clear picture of revenue from various sources. Nonetheless, the company looks all set to grow, with enhanced and better services with each passing day. Hence, this dip should be looked into as an opportunity to take positions in Amazon’s stocks.

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