Wor­ried about Ama­zon.com? Don’t be

Growth on track de­spite lat­est quar­ter

National Post (National Edition) - - FINANCIAL POST - JONATHAN RAT­NER Fi­nan­cial Post

Amid all the chat­ter about Ama­zon.com Inc.’s sharp profit de­cline in the sec­ond quar­ter re­ported on Thurs­day, the stock only fell slightly the next day.

Yes, the on­line re­tail­ing gi­ant posted a 77 per cent drop in quar­terly rev­enue, North Amer­i­can and in­ter­na­tional op­er­at­ing mar­gins con­tracted, and Q3 op­er­at­ing in­come guid­ance was sig­nif­i­cantly lower than ex­pected, but Ama­zon’s rev­enue of US$38 bil­lion (up 26 per cent) beat ex­pec­ta­tions by a sig­nif­i­cant mar­gin as growth con­tin­ues to ac­cel­er­ate across most seg­ments.

It all leaves in­vestors with a sim­i­lar taste as three months ago: Growth is on track, the com­pany is step­ping up its investments, but near-term prof­itabil­ity is lower. But does any­one care about profit when Ama­zon is cap­tur­ing more mar­ket share?

“Ama­zon has more ma­jor growth op­por­tu­ni­ties to in­vest into than any com­pany we cover,” said J.P. Mor­gan in­ter­net an­a­lyst Doug An­muth.

That in­cludes ful­fil­ment cen­tres, data cen­tres, video con­tent, mar­ket­ing, In­dia, Prime, gro­cery, and many oth­ers.

Given the ac­cel­er­at­ing growth and Ama­zon’s long run­way in both re­tail and the cloud, in­vestors would be wise to look past its lower near-term prof­itabil­ity. How­ever, An­muth be­lieves this neg­a­tive could cap some of the short-term up­side in the stock.

The lack of vis­i­bil­ity on mar­gins also raises the risk pro­file of Ama­zon shares, as mar­gin pres­sure is now a two-quar­ter trend, and the com­pany has re­turned to the 2014-15 trend of guid­ing break even or neg­a­tive op­er­at­ing in­come.

“That said, in­vestors don’t seem to mind as Ama­zon con­tin­ues to be the ‘black hole’ of re­tail, hoover­ing up mar­ket share in­ces­santly,” said Michael Gra­ham, a New York-based an­a­lyst at Canac­cord Ge­nu­ity.

While the mar­ket may be won­der­ing why Ama­zon needs to push for­ward with an­other in­vest­ment cy­cle, a quick glance at the com­pany’s to­tal ad­dress­able mar­kets an­swers that ques­tion quickly.

Ama­zon’s two key end­mar­kets are re­tail and cloud com­put­ing. Its pen­e­tra­tion in both of those re­mains just 10 to 15 per cent, and as RBC Cap­i­tal Mar­kets an­a­lyst Mark Ma­haney points out, the com­pet­i­tive moats are only get­ting deeper.

“Ama­zon re­mains ar­guably the sin­gle best play off three of the big­gest tech trends to­day — cloud, ar­ti­fi­cial in­tel­li­gence and voice­ac­ti­vated in­ter­net,” Ma­haney said. “We don’t see dra­matic near-term val­u­a­tion up­side, but we be­lieve a rea­son­able sum-of-the-parts ap­proach… does show rea­son­able up­side.”

Even­tu­ally, Ama­zon will gen­er­ate dra­matic prof­itabil­ity from these seg­ments, par­tic­u­larly Ama­zon Web Ser­vices, the an­a­lyst added.

Ama­zon’s track record with investments is well doc­u­mented. That suc­cess, cou­pled with the on­go­ing growth ac­cel­er­a­tion, jus­ti­fies its investments.

As a re­sult, long-term in­vestors should have no rea­son to al­ter their case for own­ing the stock, at least not based on this lat­est round of quar­terly re­sults.

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