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Amazon - eCommerce business saps profits

Laura Hoy, Equity Analyst | 29 April 2022 | A A A
Amazon - eCommerce business saps profits

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Amazon.com Inc Com Stk USD0.01

Sell: 143.53 | Buy: 143.54 | Change 2.91 (2.07%)
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Amazon reported first quarter net sales of $116.4bn, roughly in line with expectations of $116.3bn. That represented a 9% increase once the effect of exchange rates is stripped out. Growth reflected positive performance in North America and Amazon Web Services, while the International business declined.

Increased investment meant operating profit fell 58.6% to $3.7bn, much lower than expectations of $5.3bn. All profit growth was driven by the higher-margin Amazon Web Services business.

In the second quarter, Amazon expects net sales of $116bn - $121bn, and operating profit to be between a $1bn loss and positive $3bn.

Shares were down 8.7% in premarket trading.

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Our view

Amazon's full-court press on increasing Retail fulfilment capabilities has seriously hurt profitability. Timing hasn't been on the behemoth's side-as soon as the group increased capacity, persistent inflation called into question whether a post-pandemic spending spree can continue. The group is now focussing on efficiency to make its commerce arm less of a strain on the business.

We're happy to give newly installed CEO Andy Jassy the benefit of the doubt for now. Newer products are still showing very steady growth. The relatively new advertising proposition grew by a quarter year-on-year. We also take comfort from the fact AWS (Amazon Web Services) is already showing rapid and profitable growth following investment earlier in the pandemic.

That's part of a broader shift in the overall revenue mix towards services. Total services, which includes things like Prime as well as AWS, accounted for around half of revenues last year. Growing this area of the business is behind the acquisition of MGM studios, which comes with a formidable content backlog, including the likes of James Bond. We view the deal as a competitively shrewd move. Pouring internally generated cash into new investment opportunities is more important than ever now.

The US retail business is increasingly running up against the law of large numbers. When you're only selling $1,000 of product a year, boosting sales by 40% is relatively easy. When your annualised sales reach $470bn, finding an extra $160bn of sales is pretty difficult.

That could be one reason we think we could be approaching the end of Amazon's golden age. With high streets shut Amazon has been a natural home for consumers' spare cash. It's possible we're starting to see those tailwinds unwind - making growth more of a challenge in the years ahead. If costs consistency climb too that may make investors jumpy.

Amazon is a Pandora's box of excellent businesses. And as the uncontested king of e-commerce, the group has a tight hold on its customers. AWS is an impressive workhorse, holding up profits single-handedly as the group builds out its offerings. The big question over the next 12 months is whether it can make Retail profit-friendly. This uncertainty is somewhat reflected in the group's valuation, which has been in steady decline since the pandemic. There could be further ups and downs ahead given the uncertainty.

Amazon key facts

  • Price/earnings ratio: 52.4
  • 10-year average Price/earnings ratio: 124.4
  • Prospective dividend yield (next 12 months): 0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results

North American sales rose 8% to $69.2bn, but there was an operating loss of $1.6bn, compared to profit of $3.5bn last year, this was driven by a 16% rise in operating expenses.

International reported net sales of $28.8bn, flat on last year, and operating profits swung from $1.3bn to negative $1.3bn as expenses rose 2.2%.

Amazon Web Services (AWS) had a more positive quarter with sales up 37% to $18.4bn, while operating profit rose faster - up 53% to $6.5bn.

The group also saw a 25% rise in Advertising services revenue to $7.9bn.

Total operating costs rose 13.2%, reaching $112.8bn. This included an almost $4bn increase in fulfilment costs.

There was a free cash outflow of $18.6bn for the trailing twelve month period, compared to an inflow of $26.4bn at the same point last year. The group had net cash of $18.8bn, as at the end of March.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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