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Amazon sets stage for stock gains
After posting strong quarterly results, the online retailer's stock is likely to test its 52-week high.
By Robert Walberg
Though the numbers don't include the benefit of the recent Harry Potter release, Amazon.com's second-quarter earnings were magical, and the company's stock will benefit. Here's how Amazon's (AMZN, news, msgs) numbers break down:
Pro-forma earnings of 12 cents a share beat consensus estimate by 2 cents, or 20%.
Revenues were up 26% to $1.75 billion, with international sales surging 50% to $793 million. In the year-ago quarter, international sales grew by "only" 33%. Wall Street expected $1.73 billion in total sales.
The operating profit margin of 6% was up 0.3 of a percentage point sequentially, reversing a downward trend that was concerning to many on the Street. However, it should be noted that operating margins were still down 0.2 of a percentage point year over year.
The international operating profit of $60 million was up by an eye-opening 177%.
The company delivered strong double-digit sales growth in its key product segments, with electronics up 40% to $456 million.
Free cash flow for the trailing 12 months jumped 17% to $486 million.
The company expects third-quarter sales of $1.79 to $1.91 billon. The median point of $1.83 billion is ahead of current consensus estimate of $1.81 billion.
A nice showing
So the numbers show that that the company could improve profit margins in a highly competitive pricing environment. The company also showed that it's making considerable progress with its overseas operations. (I also wrote about Amazon in May.)
There are still some areas of concern, however. First and foremost, fulfillment costs were up 25% from the year-ago period, almost exactly the pace of sales growth. Management noted that the opening of new distribution centers was partly responsible for the big jump. Nevertheless, until revenues are growing materially faster than fulfillment costs it will be difficult for the company to sustain margin growth. And margin growth is critical to Amazon winning support from investors.
Then there's still the question of whether the company's Amazon Prime, a program that allows for free two-day shipping regardless of purchase price to customers willing to pay an upfront annual fee of $79 per year, will achieve management's goal of driving long-term sales growth. The costs of the program are high, and it certainly doesn't help margins over the short term.
What's ahead
But to its credit Amazon's management team has never put meeting short-term expectations over achieving long-term goals. CEO Jeff Bezos has also proven that he knows what he's doing when it comes to running an online retailer, so investors are likely to cut the firm some slack on this program for at least another few quarters.
The future for Amazon looks promising, especially when you consider the record sales numbers for the latest Harry Potter novel. Look for the Street to modestly boost its estimates over the next few days. Ratings upgrades are also probable. The combination will boost the stock, which was up more than 10% in after-hours trading. A near-term test of its 52-week high of $45.68 is almost certainly in the cards.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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