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Why Is Amazon (AMZN) Down 11.4% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Amazon (AMZN). Shares have lost about 11.4% 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 Q2 Earnings Miss, Revenues Beat Estimates

Amazon reported second-quarter 2019 earnings of $5.22 per share, surging 3% from the year-ago quarter. However, the figure missed the Zacks Consensus Estimate by 7 cents.

Further, net sales of $63.40 billion comfortably surpassed the Zacks Consensus Estimate of $62.569 billion and came within the company’s guided range of $59.5 billion to $63.5 billion. Further, the figure exhibited year-over-year growth of 20%.

Excluding the unfavorable foreign exchange impact, sales would have exhibited improvement of 21% year over year.

North America revenues (61% of sales) increased 20.2% from the year-ago quarter to $38.65 billion. International revenues (25.8% of sales) increased 12% year over year to $16.37 billion. Amazon Web Services (AWS) revenues (13.2% of sales) surged 37.3% year over year to $8.38 billion.

The company’s strong endeavors to strengthen delivery system further contributed to the results. Prime Free One Day service remained a major positive throughout the quarter as it helped in gaining traction among customers. Moreover, solid momentum across Prime and expanding AWS portfolio drove the top line. Additionally, robust skill set of Alexa was a tailwind.

Prime Expansion: Key Catalyst

During the second quarter, the e-commerce giant remained focused on grocery services. The company’s two-hour delivery service of natural and organic products from Whole Foods stores via Prime Now expanded to additional U.S. cities, thus making it available in 90 U.S. metros.

Further, AmazonFresh, which is another Prime enabled fast delivery service for daily essentials and grocery items, was introduced in Las Vegas.

Prime Free One Day service, which is Amazon’s free one-day shipping service, was extended across the United States. Further, the service now covers 10 million products.

Amazon also expanded Prime’s global presence by rolling out the service in the United Arab Emirates during the reported quarter.

Additionally, it launched Amazon Flex in India, in order to strengthen its Prime delivery services in the country. Notably, the service also encourages non-Prime delivery.

Apart from the delivery system, the company also focused on streaming services. Prime Video aired original series, Good Omens. Further, it streamed Jonas Brothers documentary, Chasing Happiness.

Further, Prime Video received double the Emmy nominations compared with year-ago quarter owing to robust original content portfolio. It received 20 nominations for The Marvelous Mrs. Maisel and 11 nominations for Fleabag alone. Total number of nominations stood at 47.

Additionally, Amazon announced integration with Alphabet’s (GOOGL) division Google and recently Prime Video and YouTube on each other’s streaming devices.

Further, the company witnessed splendid Prime Day performance in which sales outpaced the combined sales of Black Friday and Cyber Monday.

AWS Momentum Aided Growth

AWS, which contributes to the company’s net sales, witnessed significant improvement in the top line driven by expanding services portfolio that helped it in winning a number of customers during the reported quarter.

The company announced the general availability of several services — Amazon Managed Streaming for Apache Kafka (Amazon MSK), AWS Ground Station, Amazon Managed Blockchain, Amazon Personalize, AWS Control Tower, AWS Security Hub and Amazon Textract.

Further, Amazon won several customers during the reported quarter such as National Association for Stock Car Auto Racing selected AWS as its preferred cloud computing, cloud ML and cloud AI Provider. Moreover, Emirates NBD collaborated with AWS to build a personalized retail customer banking experience by leveraging AWS machine learning services. Further, Sony Music Entertainment Japan became part of AWS customer base during the reported quarter.

Additionally, Hyundai Electric & Energy Systems introduced high performance computing (HPC) system by utilizing AWS services.

Alexa, Fire TV & Echo Gaining Traction

Amazon continued to enhance the skills and features of Alexa during the reported quarter. Alexa Guard, which aids in detecting the sounds of smoke alarms, carbon monoxide alarms, and glass breaking, was made available across the United States. Alexa Guard that can be connected to ADT or Ring alarm systems.

Moreover, Alexa Announcements was rolled out in Germany, France, Spain, Italy, and Mexico. Furthermore, Alexa Outbound Calling in the U.K. enables users in the country to make outbound calls.

Additionally, in order to bolster presence in the international virtual assistant market, Amazon unveiled ability for Alexa developers to earn money utilizing in-skill purchasing for their skills in countries like Japan, Germany, and the U.K.

Further, increasing integration of Alexa with more devices and vehicles will continue to aid its adoption rate. Alexa can be accessed from new headphones from Bose and Jabra, selected TVs from LG and ecobee’s latest thermostat. Moreover, the software is now available in selected Lexus, Toyota, BMW and MINI vehicles in Germany and the U.K.

This shows that the number of Alexa compatible smart home devices is increasing, which currently has exceeded 60,000.

Apart from Alexa, Amazon launched Echo Show 5 during the second quarter, thus expanding the Echo Show family. Further, the company rolled out Echo Dot Kids Edition. It also unveiled all-new Kindle Oasis, consequently enhancing its Kindle offering.

Further, the company banked on Fire TV, which has now more than 34 million active users worldwide. It launched all-new Fire 7 and all-new Fire 7 Kids Edition tablets.

Quarter Details

Product sales (56.6% of sales) increased 12.5% year over year to $35.86 billion. Service sales (43.4% of sales) surged 31% from the year-ago quarter to $27.55 billion.

Operating expenses were almost $60.32 billion, up 20.9% from the year-ago quarter. Cost of sales, fulfillment, marketing, technology & content, general & administrative and other operating expenses improved 18.6%, 16.8%, 47.9%, 25.1%, 14.3% and 7.5%, respectively.

As percentage of revenues, operating expenses increased 80 bps on a year-over-year basis to 95.1%.

On the cost side, the company’s spending on transportation for one day delivery were higher than its estimated $800 million. This impacted the profits of the company.

Operating income jumped 3.4% from the year-ago quarter to $3.08 billion. Operating margin contracted 78 bps from the year-ago quarter to 4.9%.

Operating income for North America and AWS came in $1.56 billion and $2.12 billion, down 14.8% and up 29.2%, respectively.

International segment reported a loss of $601 million compared with the year-ago quarter’s loss of $494 million.

Guidance

For third-quarter 2019, Amazon expects net sales between $66 billion and $70 billion. The figure is anticipated to grow in the range of 17-24% on a year-over-year basis.

Management projects an unfavorable impact of approximately 30 bps from foreign exchange rates.

Operating income is expected between $2.1 billion and $3.1 billion compared with $3.7 billion in third-quarter 2018.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -23.16% due to these changes.

VGM Scores

Currently, Amazon has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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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