Amazon Share Price Under Watchlist; Early Warning Sign For Investors

Introduction: Amazon.com, Inc. (NASDAQ: AMZN) is engaged in the provision of online retail shopping services. The company operates through three business segments namely North America, International and Amazon Web Services.

As per a few analysts’ reports, there has been an unusual change in money flows for Amazon. The momo crowd money flows, which were earlier found to be very positive, have now turned mildly negative. Momo play or momo crowd money flows relate to an investment made on the basis of momentum, without taking into account the company’s fundamentals. An investor follows the strategy of investing in stocks that have recently gone up based on the belief that such a stock would continue to see an upside. The smart money flows for the company have recently taken a negative turn, which has not taken shape in the stock price yet. Therefore, analysts have suggested the investors to be wary of the consequences of the above scenario and keep an eye on the company’s money flows.

Let us now have a look at the latest financial update of the company.

Q2FY19 Results: The company recently released the financial results for the quarter ended 30 June 2019. During the quarter, the company witnessed an uplift in net sales, operating income and net income, along with a positive response from customers to Prime’s one-day delivery.

Financial Highlights:

• Net sales for the quarter were reported at $63.4 billion, representing an increase of 20% on prior quarter’s net sales of $52.9 billion. The value increased by 21% over the previous quarter, excluding the unfavourable impact worth $814 million due to year-on-year changes in foreign exchange rates.
• Net sales of the company comprise of revenue from sale of products and related shipping fees. In addition, the company generates revenue from- AWS sales, Amazon Prime membership fees, advertising services, digital content subscription, third-party seller fees etc.
• Operating income for the quarter was reported at $3.1 billion, representing a marginal increase over prior corresponding period’s operating income of $3.0 billion.
• Net income for the quarter came in at $2.6 billion, as compared to net income of $2.5 billion in the prior corresponding period. Net income per diluted share amounted to $5.22 in the second quarter, as compared to $5.07 in the prior corresponding period.

Net Sales (in $millions; Source: Company’s Presentation)

Three-Month Segment Performance: During the quarter, North America segment reported net sales amounting to $38,653 million, as compared to $32,169 million in prior corresponding period. Operating income from the segment was reported at $1,564 million, down 14.77% in comparison to $1,835 million in prior corresponding period. The decline in operating income came in as a result of increase of $6,755 million in operating expenses. The decrease in net income was primarily due to increased marketing expense and shipping costs which was partially offset by increased unit sales, advertising sales and slower growth in certain operating expenses.

Net sales for the international segment stood at $16,370 million, representing an increase of 12.03% over prior corresponding period sales of $14,612 million. The segment reported an operating loss of $601 million, as compared to pcp loss of $494 million.

Amazon Web Services reported net sales amounting to $8,381 million, as compared to $6,105 million in the prior corresponding period. This was the only segment, which reported an increase in operating income at $2,121 million, representing an increase of 29.17% over prior corresponding period value of $1,642 million. Operating income for the segment increased due to the cost structure productivity and increased customer usage, partially offset by increased spending on technology infrastructure, payroll & related expenses and change in pricing.

Six-Month Segment Performance: North America’s net sales for the six months ended 30 June 2019 were reported at $74,465 million, as compared to $62,894 million in pcp. The half yearly operating income for the segment witnessed an increase of 29.05% at $3,851 million, as compared to a downfall based on the second quarter’s performance.

International segment reported net sales amounting to $32,563 million, as compared to $29,487 million in prior corresponding period. Operating loss also improved in comparison to prior corresponding period at $690 million, as compared to $1,116 million in pcp.

Net sales for AWS stood at $16,076 million, up on prior corresponding period net sales of $11,547 million. Operating income for the half stood at $4,343 million, as compared to $3,043 million in prior corresponding period.

Cash flows: During the quarter, cash from operating activities amounted to $9,118 million, as compared to $7,449 million in prior corresponding period. Operating cash flow represented inflow from cash paid by seller, advertisers, developers and content creator customers.

Cash used in investing activities stood at $7,549 million, as compared to $2,692 million in prior corresponding period. The cash used comprised of capital expenditure, including leasehold improvements, incentives received from property and equipment vendors, cash outlays for acquisitions and so forth.

Cash used in financing activities was reported at $2.2 billion, as compared to $1.4 billion in prior corresponding period.

Key Risks: The risks associated with Amazon’s business are majorly attributable to the rapidly evolving competition, ongoing expansion into new geographies and offerings & significant fluctuations in operating results and growth rate.

• Due to the rapidly increasing competition in different industries, including physical, e-commerce services, digital content and electronic devices etc, there is a peer pressure to pace up with the new and enhanced technologies introduced by the competitors.
• Expanding the business’ global operations induces the complexity of the business impacting the management, personnel, financial resources, internal financial control and reporting functions. As a result, the company may not be able to manage growth effectively.
• The company is also exposed to risk from international operations such as difficulty in adjusting to local economic and political conditions, restrictions on sales or distribution of certain products or services, business licensing and certification requirements etc.
• The uncertainty regarding growth rate in operating results and growth rate poses a major risk to the business, as the company’s expense level and investment plans are based upon the sales estimates.

Third Quarter Guidance: The company provided its financial guidance for the quarter ended 30 September 2019, stating the uncertainty of the forecast due to potential impact of fluctuation in foreign exchange rates, changes in global economic conditions and customer spending, growth rate of internet, online commerce, cloud services etc.

• Net sales for the quarter are expected to be in the range of $66.0 billion - $70.0 billion, representing a growth rate in the range of 17% - 24% as compared to prior corresponding period. The guidance for net sales takes into account the unfavourable impact of approximately 30 basis points from foreign exchange rates.
• Operating income for the quarter is expected to be between $2.1 billion and $3.1 billion, as compared to $3.7 billion in prior corresponding period.

Stock Performance: The stock of Amazon.com, last traded on NASDAQ at $1,785.30, down by 8.86 or 0.49 percent (as on 23 September 2019) from its last close. The market capitalisation of the company was at $883.11 billion.

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