Questions raised by Amazon’s financial report

Amazon has just released one of the more interesting financial reports of recent times. While retail sales are up 25 per cent year-on-year, with second-quarter revenue hitting $38 billion, profit has slumped with quarterly income down 77 per cent. The ecommerce giant has even indicated that it could even lose up to $400 million in operating costs during the current quarter. 

So what does that mean? Will investors flee, will Amazon stop its new ventures or hold back on investing in smaller companies? Not a chance. Shares – up nearly 40 per cent this year – have slumped 3 per cent following the announcement but Amazon is going to plow on with spending anyway. Beyond reflecting retail’s notoriously thin margins, the forecast signalled Amazon would invest heavily to maintain its dominance.

"Q3 is generally a high investment period," Chief Financial Officer Brian Olsavsky said. "Our video content spend will continue to grow, both sequentially and quarter over quarter." Indeed, investing in faster shipping and video looks like it will continue, as well as investing heavily in its Prime and Fresh services. Subscription sales including Prime fees rose 51 per cent in the second quarter to $2.2 billion.

Cowen & Co analysts have estimated that more than 50 per cent of U.S. households will have Prime membership by the end of 2017. "The fact that they are investing on so many fronts right now just speaks to the opportunity that they have before them," said Edward Jones analyst Josh Olson. "We are giving them the benefit of doubt here because they have executed so well historically."

Meanwhile Martin Garner, Senior Vice President at CCS Insight expects Amazon’s investment to pay off in the long term. “We expect Amazon to continue its run of stellar results, fuelled by AWS and its recent Prime Day helping to drive ecommerce to new highs. But investors will also be looking for an update on its recent major acquisitions of in the Middle East, and Whole Foods in the US. Key operating issues to look for in Amazon’s 2Q17 earnings are AWS growth at a similar level to Microsoft’s cloud services, whether Amazon’s huge investment in ecommerce in India and Mexico are starting to pay off yet, and any information on the consumer reception of the Echo Look and Show devices.”

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