Amazon.com’s (AMZN) shares plunged nearly 10% to the lowest level in six months following first-quarter earnings and weak guidance due to the continued high level of investments.
Amazon hasn’t had a very good track record of late, missing estimates as often as it beats them. The drop in share price underscores shareholders' concern regarding these huge investments taking a toll on the company’s bottom line.
Amazon seems focused on spending a significant amount of money, both internationally and domestically, despite low returns. The company has gone on to become a veritable consumer electronics giant from being an Internet retailer initially. It has been investing considerably on its fulfillment centers to cater to the growing needs of its consumers. Also, the company is expanding its cloud-computing business, Amazon Web Services (AWS), to maintain its lead and expand its community of small and medium-sized businesses.
Amazon is also making an unprecedented push into hardware. The smartphone, grocery and TV set-top box markets are already crowded, so execution risk continues to grow. Though Amazon’s increasing focus on these hardware products would potentially boost sales, it will likely weigh on margins and increase competition from tech companies like Apple (AAPL), Google (GOOG) and other online retailers like Wal-Mart Stores (WMT).
Amazon also prices very aggressively, which makes cost recovery difficult in the absence of very high volumes.
The serious financial damage caused to the company can be seen in the recently concluded first-quarter results. Amazon’s heavy investments (headcount, fulfillment centers, content among others) drove up all its costs. Specifically, fulfillment, marketing, technology & content and G&A costs increased year over year as a percentage of sales by 56 basis points (bps), 47 bps, 148 bps and 13 bps, respectively.
Operating margin was just 0.7% which shrank 125 bps sequentially and 39 bps from the year-ago quarter. The net margin was also very low at 0.5% compared to 0.9% in the previous quarter and 0.6% in the year-ago quarter.
Nevertheless, we believe in Amazon’s prospects, especially its platform approach (Kindle, Prime and AWS). We believe that Amazon is performing true to its form, continuing to grow its revenues and generate strong cash flow quarter upon quarter (discounting seasonal variations).
As such Amazon remains one of the leading players in the fast-growing ecommerce market. We think that this has been possible because of the broad selection, free shipping and user experience that Amazon has consistently provided. This has enabled the company to gain from the shift in offline to online consumption.
Amazon shares carry a Zacks Rank #3 (Hold).
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment