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Amazon (AMZN) Down 1.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Amazon (AMZN). Shares have lost about 1.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Amazon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Amazon's Q1 Earnings Miss, Revenues Up Y/Y

Amazon.com reported first-quarter 2020 earnings of $5.01 per share, missing the Zacks Consensus Estimate by 21.2%. The bottom line also declined 29.3% from the year-ago quarter.

Net sales of $75.45 billion comfortably surpassed the Zacks Consensus Estimate of $74.36 billion and exceeded management’s guided range of $69 billion to $73 billion. Further, the figure improved 26.4% on a year-over-year basis.

The coronavirus pandemic remained a concern as it put a stop on the sale of non-essential items and luxury commodities during the reported quarter. Further, the crisis scenario led to increased expenses. Notably, Amazon spent more than $600 million in order to combat coronavirus-induced disruptions in the first quarter.

Nevertheless, the stay-at-home situation resulted in a steep rise in the consumer demand for groceries, healthcare goods and other essential items, which contributed to the quarter under review.

North America revenues (61% of sales) improved 28.8% from the year-ago quarter to $46.1 billion. International revenues (25% of sales) climbed 18% year over year to $19.1 billion. Amazon Web Services (AWS) revenues (14% of sales) surged 32.8% year over year to $10.2 billion.

The top line was primarily driven by solid customer demand, strong Amazon Web Services (AWS) momentum, expanding smart devices portfolio and strengthening content portfolio on Prime Video.

Moreover, solid momentum across third-party sellers remained a major positive during this pandemic situation. Also, expanding grocery delivery and pick-up services at Whole Foods stores were tailwinds.

However, uncertainties and economic disruption owing to rapidly spreading COVID-19 continues to remain a major headwind. Amazon plans to spend $4 billion in a bid to protect its workforce, delivery vans and customers from COVID-19 infection while addressing the rising customer demand, in the ongoing quarter.

Nevertheless, Amazon’s strong global presence remains a major positive. Additionally, growing Prime and AWS momentum, strengthening Alexa skills and expanding smart devices portfolio are likely to drive the company’s business in the near term.

Prime Momentum

Amazon Prime momentum continued to benefit the company during the reported quarter on the back of robust grocery services, customer-oriented benefits, international footprints and expanding original content despite coronavirus-induced disruptions.

The company expanded delivery capacity by 60%. Further, it expanded its grocery pick-up services from 80 Whole Foods stores to 150 of them.

Further, the company opened its first cashierless grocery store namely Amazon Go Grocery in Seattle during the reported quarter.

The company also launched Prime in Netherlands in the first quarter, which expanded its international presence. Prime service in the country offers free shipping, Prime Video, Twitch Prime and Amazon Photos. Along with Prime, the company launched Amazon.nl.

Furthermore, Prime Video premiered Making the Cut during the reported quarter. Further, it expanded its regional original content by streaming Love Island in France, Celebrity Hunted in Italy and The Forgotten Army in India during the reported quarter. Also, it streamed docuseries namely The Test: A New Era for Australia’s Team in Australia in the same quarter.

Additionally, Amazon rolled out its premium movie rental service Prime Video Cinema that allows users to stream in-theater movies in the United States, the U.K. and Germany. The service included the titles like Birds of Prey, The Invisible Man, Onward, Emma and Trolls World Tour.

Expanding AWS Portfolio: A Key Catalyst

AWS that witnessed significant improvement in the top line, continued to gain momentum across customers during the first quarter courtesy of strengthening services portfolio.

AWS made its new security service namely Amazon Detective generally available to customers. Notably, the service helps customers to analyze, investigate and identify the source of security issues.

Further, expanding availability zones and regions contributed to the results. Currently, AWS has 76 Availability Zones within 24 geographic regions.

Additionally, AWS’ highly efficient and reliable product and services portfolio helped Amazon in gaining traction across several government authorities, health organizations, apex bodies, companies and non-profit organizations during the coronavirus-induced crisis

The World Health Organization (WHO), New York City COVID-19 Rapid Response Coalition, Los Angeles Unified School District, National Health Service of England, Kentucky and West Virginia authorities, Cerner and Volunteer Surge, are some of these customers that utilized AWS solutions to combat the coronavirus. Further, AWS gained traction across healthcare workers, medical researchers, scientists and educational institutions during this pandemic scenario.

Alexa & Expanding Smart Devices Offering

Amazon continued to enhance the skills and features of Alexa during the reported quarter. Moreover, advancing Alexa features with increasing number of devices compatible with Alexa remains a key positive.

The company made Alexa available on select LG and Samsung Smart TV 2020 models and the new OnePlus 8 mobile phone. Further, Alexa access is available in BMW vehicles in the United States. It is also available in MINI vehicles in the United States, France, Italy, Spain and Austria.

Apart from Alexa, the company banked on strengthening Fire TV family of products.

Additionally, Amazon unveiled Ring Video Doorbell 3 and Ring Video Doorbell 3 Plus during the reported quarter, which expanded its smart doorbell offering. Further, the company rolled out its new versions of its Ring Chime and Ring Chime Pro in the United States., the U.K., Canada, Australia and New Zealand.

Quarter Details

Product sales (55.5% of sales) increased 22% year over year to $41.8 billion. Service sales (44.5% of sales) surged 32.2% from the year-ago quarter to $33.6 billion.

Operating expenses were $71.5 billion, up 29.3% from the year-ago quarter. As percentage of revenues, the figure expanded 210 bps on a year-over-year basis to 94.7%.

Cost of sales, fulfillment, technology & content, marketing, and general & administrative increased 30.5%, 34.1%, 17.6%, 31.8% and 23.8% to $44.3 billion, $11.5 billion, $9.3 billion, $4.8 billion and $1.4 billion, respectively, on a year-over-year basis.

Other operating expenses were $70 million during the first quarter compared with $5 million reported in the year-ago quarter.

Operating income decreased 9.7% from the year-ago quarter to $3.9 billion. Further, operating margin contracted 210 bps from the year-ago quarter to 5.3%.

Operating income for AWS came in $3.1 billion, up 38.3% year over year. However, the same for North America declined 42.6% from the prior-year quarter to $1.3 billion.

Further, International segment reported a loss of $398 million, wider than the year-ago quarter’s loss of $90 million.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash and cash equivalents stood at $27.2 billion compared with $36.1 billion as of Dec 31, 2020. Further, marketable securities totalled $22.1 billion at the end of the first quarter, up from $18.9 billion at the end of the fourth quarter.

Long-term debt was $23.44 billion in the reported quarter compared with $23.41 billion in the previous quarter.

Further, the company generated $3.1 billion of cash from operation in the first quarter, which declined significantly from $19.7 billion in the prior quarter.

Guidance

For second-quarter 2020, Amazon expects net sales between $75 billion and $81 billion. The figure is anticipated to improve in the range of 18-28% on a year-over-year basis.

Management projects an unfavorable foreign exchange impact of approximately 70 bps.

Proceed from operational activities are likely to range from operating loss of $1.5 billion to operating income of $1.5 billion. Notably, the company reported an operating income of $3.1 billion in the year-ago quarter.

This guidance is inclusive of $4 billion costs related to COVID-19.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -70.91% due to these changes.

VGM Scores

Currently, Amazon has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Amazon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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