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Amazon Earnings Miss the Mark, Stock Drops $15 in After-Hours Trading

Last Updated September 23, 2020 12:51 PM
Lawrence Meyers
Last Updated September 23, 2020 12:51 PM

Amazon stock is down about $15, or 1 percent, in after-hours trading after the company missed earnings estimates by 6 percent. The e-commerce giant did manage to beat the revenue estimate by about 1 percent. Results do not include Prime Day.

Amazon’s Revenue Now Half of Walmart’s

Amazon continues to crush the retail and cloud world with $63.4 billion in revenue in the second quarter alone, zooming 20 percent from the comparable quarter last year.

Amazon’s annualized revenue rate is now about 50 percent of Walmart’s. More than 79 percent of the company’s sales come from e-commerce.

Amazon is a cash flow machine that cannot be stopped, and its growth is astonishing. Operating cash flow exploded 65 percent to $36 billion for the trailing 12 months, compared to $21.8 billion for the previous trailing 12-month period.

This incredible operating cash flow filtered down to $25 billion in free cash flow over the same period, up from a mere $10.4 billion.

Operating income hit $3.1 billion in the quarter compared to $3 billion in last year’s first quarter.

Net income came in at $2.6 billion, up a fraction from last year’s $2.5 billion.

The reduced operating and net income lines were partially a result of Amazon pushing to one-day delivery in places.

AWS Falters but Growth Impresses

Nobody can keep Amazon or Jeff Bezos down, but one sore spot is Amazon Web Services (AWS).  The segment had been seeing blockbuster growth.

This past quarter, AWS generated $8.4 billion in revenue and operating income of $2.1 billion. Amazon’s cloud revenue grew an incredible 37 percent, but that was down from 41 percent in the first quarter, 46 percent from Q4, and 49 percent in last year’s second quarter.

Only with a FAANG stock would 37 percent segment growth be disappointing.

Amazon isn’t just crushing it on the finance side. It is providing incredible job growth.

Amazon plans to hire 25,000 “highly-skilled” employees over the next 10 years for its Arlington, Va. HQ.  This urban campus is going to result in a complete renovating of empty warehouses and will include retail, business, and outdoor space.

Over in Europe, Amazon plans to hire 12,000 new employees by year-end, reaching a total of 95,000.

Amazon also is committed to enhancing employee skill sets by providing additional training to 100,000 of its domestic employees in the next five years.

Is Amazon Stock Cheap?

The ongoing question about Amazon stock concerns its valuation. How can investors place a valuation on a company that can throttle its net income up or down based on how the CEO wants to allocate cash flow?

amzn chart
AMZN shares traded in the red today. | Source: Yahoo Finance

If we simply look at a P/E ratio, with $11.9 billion in trailing 12-month net income and a market cap of $936 billion net of cash, I can’t imagine justifying buying the stock at 81x earnings.

There are other ways to look at net income. Analysts’ five-year annualized growth rate is 61 percent, creating a PEG ratio of 1.33; one might be able to support the idea that Amazon stock is fairly valued.

On a price-to-sales ratio, Amazon stock also trades at 3.66x revenues compared to Alphabet Inc.’s 5x revenue. So perhaps Amazon is a bargain.

What we do know is that Jeff Bezos executes on just about anything he does. Despite an antitrust investigation at the DOJ, Amazon stock seems likely to keep soaring.

Disclaimer: This article is intended for informational purposes only and should not be taken as investment advice.