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Amazon - top line beat but EV investment drives loss

Second quarter sales rose 7% to $121.2bn, beyond expectations for $119.1bn. This reflected growth in all categories bar International retail sales...

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Second quarter sales rose 7% to $121.2bn, beyond expectations for $119.1bn. This reflected growth in all categories bar International retail sales.

Operating profit more than halved to $3.3bn as an 11.9% increase in costs weighed on margins. The group reported a net loss of $2.0bn, primarily driven by the group's investment in electric vehicle business Rivian Automotive.

Sales in the third quarter are expected to be between $125.0bn and $130.0bn and operating profit between breakeven and $3.5bn

The shares rose 11.1% following the announcement.

View the latest Amazon share price and how to deal

Our view

Amazon's sales growth in the face of persistent inflation shows the e-commerce giant's hold on the industry is ironclad as ever. However the cost to keep pace with fulfilment took a bite out of profits, proving there are some chinks in Amazon's armour.

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.

For that reason, sales growth in the retail part of the business could be muted for the foreseeable. Add to that consumers who are starting to tighten their purse strings and there's more reason than ever to balance the cost base accordingly

Efficiency improvements are top of the list of priorities to bring Retail into the black, but there's only so much to be done given rising staff and logistics costs. Fast, free shipping is a huge part of the draw for Prime members and that's expensive to maintain, keeping margins from making much progress. but it's services that we think will make all the difference. It was impressive to see the group's newly broken out Advertising arm making progress even as some of the industry's greats warned that ad spend was starting to run dry. It's really saying something that Amazon's side hustle is thriving in this climate, a testament to the power of Prime. Troves of data footprints and millions of customers ready and willing to click buy are a marketer's dream.

The focus on advertising is 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 March 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.

Luckily Amazon's been able to lean on its cloud business AWS as it works to squeeze more out of its other businesses. AWS is responsible for all of the group's profits, a strategy that's been working so far, though eventually retail will need to pick up the slack.

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 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. But even then, a price-to-earnings ratio above 70 is punchy. There could be further ups and downs ahead given the uncertainty.

Amazon key facts

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.

Second Quarter Update

North American sales were up 10% to $74.4bn and remained the largest division, but operating expenses rose at a faster rate, up 16.5%. This led to a $627m operating loss. This division continued to build out its grocery offering with 12 new Amazon Fresh stores opened in the period.

International sales declined 12% to $27.1bn. Despite costs falling 5% the division swung from operating profits of £362m to a $1.8bn operating loss.

Amazon Web Services saw revenue rise by a third to $19.7bn helped by new partnerships with BT, Jefferies and Delta Air Lines. Costs rose at a similar clip, leading to operating profit growth of 36.3% to $5.7bn.

Advertising Services revenue was up 18% to $8.8bn and launched a new tool allowing real-time access to campaign insights.

Fulfillment costs rose from $17.6bn to $20.3bn and the group upped spending on technology and content by 30.3%. The group's Prime Video debuted five original TV series during the period and three movies. The autumn content slate includes exclusive rights to America's NFL Thursday Night Football and a Lord of the Rings series.

The group had a free cash outflow of $6.8bn, which fed into net debt of $63.9bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 29th July 2022