Amazon.com, Inc. (NASDAQ:AMZN) reported its first quarter 2015 results after the close of business on April 23. Ahead of the first quarter report, investors were on high alert to find out whether the company is winning the online retail war or losing out to rivals. Equally important to investors in recent years has been Amazon's cloud business, known as Amazon Web Services (AWS).
Amazon plays in the market category where barriers to entry are too low, allowing new competitors to get in at will, hence the intense competition. Nonetheless, Amazon's scale of warehousing and power enables it to operate more efficiently than others. But here is a company that many investors haven't properly understood, pointing to sky high PEs and lack of GAAP profit. Amazon does not merely compete to win market share, the company works to reinvent the market, allowing it to open new revenue sources.
The reason Amazon managed remarkable gain in the first quarter is that the company set off to a positive start in 2015, with robust third-party same-store sales (3P SSS). Amazon Web Services (AWS) is also gaining traction at an impressive pace, contributing positively to first quarter top-line results – $ 1.57 billion.
Amazon.com, Inc. (NASDAQ:AMZN) is battling slowdown in Europe, an unfavourable foreign exchange environment and investing more money in its expansion, including AWS, the hardware business and distribution centers. All these combined are having an adverse impact on its EPS in the first quarter as well as in the short-term view.
First quarter financial highlights
- Overall revenue rose on the back of sturdy North America sales and expanding cloud services to $ 22.7 billion, a 15% year-over-year uptick. Revenue came ahead of Wall Street's estimate of $ 22.39. At $ 0.12, EPS was in line with the consensus estimate.
- Amazon.com, Inc. (NASDAQ:AMZN)'s operating cash flow grew to $ 7.85 billion over the trailing twelve months in the first quarter, from $ 6.84 billion, TTM, in the fourth quarter. Free Cash flow over the trailing twelve months, is $ 3.16 billion,
- AWS revenue rose about 50%, to $ 1.57 billion. Operating income of the unit was $ 265 million, up 8%. CEO, Jeff Bezos, made it clear that AWS is a $ 5 billion business currently but continues to grow.
Second quarter guidance
Amazon guided for second quarter revenue in the band of $ 20.6-$ 22.8 billion. The consensus estimates call for revenue of $ 22.11 billion. Looking at the estimates alongside the in-house guidance, the management of Amazon is clearly more optimistic than Wall Street about improving quarterly revenue of the company.
When things stabilize in Europe, expansion of AWS takes roots and ongoing investments start paying dividends, Amazon will have no problems posting quarter after quarter of EPS and revenue gains. But with so many moving parts, the bulk of focus on Amazon's financial results is currently on operating income.
Healthy U.S. business
Amazon.com, Inc. (NASDAQ:AMZN) is growing faster in the U.S. than the overall e-commerce industry.
In the U.S., Amazon is not only successfully expanding its existing businesses, but also introducing new products and services to tap incremental revenue. The company recently launched the professional services marketplace, which allows it to take a cut from sales made through that platform. In the latest move, the company launched Amazon Destinations, a hotel listing service that is expanding the company's efforts in the lucrative travel business.
Amazon is not currently disclosing pricing details for the Amazon Destinations service, but the company revealed plans to be competitive with Booking.com and Expedia Inc (NASDAQ:EXPE), which are prominent names in the travel market and charge commissions in the range of 10-25%.
As competition heats up in the lowest price category, Amazon isn't simply mourning, but trying to woo customers with faster delivery services. The company is hoping, and rightly so, that customers will be more willing to pay higher prices for accelerated deliveries. If that strategy succeeds, Amazon is able to remain unscathed with Jet.com's aggressive push for the lowest price in the online retail market.
The company is also winning sellers from rival eBay, thanks to its larger and rapidly growing user base. Amazon boasts more than 270 million active buyers, larger than 155 million at eBay.
From hardware to services and software, Amazon.com, Inc. (NASDAQ:AMZN) is looking for new ways to monetize its products in the U.S., a strategy that should help it hedge against unfavourable conditions in the international market.
Tepid global trend
The international market is a major blot in Amazon.com, Inc. (NASDAQ:AMZN)'s performance story and will likely hurt results in the coming report. The company is battling soft demand and weak currency in Europe. So far the management remains hopeful that continued growth in the domestic market will be able to offset softness in the international scene, but prolonged weakness in Europe and elsewhere might cause havoc for Amazon. Hopefully, the European Commission earlier this year took measures to trigger economic growth in the region with Quantitative Easing measures, which should improve the retail situation in the market.
In China, Amazon is facing intense competition from the market leader, Alibaba Group Holding Ltd (NYSE:BABA). Amazon doesn't simply fight for market share, however, but takes a calculated approach to take on competitors. The company is riding on rival platforms in China to reach Chinese buyers. That means that it is able to defend its share of the market, despite the intense competition.
AWS financial breakout
Amazon.com, Inc. (NASDAQ:AMZN) promised to provide a financial breakout of its cloud computing business, AWS, and lived up to that promise. The company said revenue from its cloud services business increased about 50%, to $ 1.57 billion, representing about 7% of its total revenue for the first quarter. Amazon further said operating income of its AWS business jumped 8%, to $ 265 million. The step to disclose AWS financials helped clear long-standing doubts in the segment, while providing visibility into the company's profitability path.
Amazon is building its cloud service arm, AWS, into a large business and a leader in cloud infrastructure. At about $ 5 billion in annual revenue, AWS is about ten times larger than its closest rival, Azure from Microsoft Corporation (NASDAQ:MSFT).
The cloud infrastructure market is expected to reach $ 17 billion this year, and double in size by the next three year.
Conclusion
Amazon.com, Inc. (NASDAQ:AMZN) is doing all that a company in its category needs to be doing to grow and combat competition. Performance numbers may not be impressive in GAAP terms, but they are improving as the company continues to invest operating cash flow to grow top-line and cash flow over the long term. The company is investing for the future and its long-term prospects are huge. Its AWS business is gaining traction and should be able to stay ahead of competitors for the long haul, thanks to aggressive pricing strategy.
Use of drones for deliveries and more distribution centers should help the company to attain its delivery dreams, allowing for more revenue inflow. Introduction of new services, such as professional home services and Amazon Destinations, are lucrative areas that should have overall significant impact on the company's performance for the long-term.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
Neha Gupta
Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.
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