Amazon Again Delivers Big Growth On Thin Margins

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AMZN: Amazon logo
AMZN
Amazon

Amazon (NASDAQ:AMZN) reported its Q2 2012 earnings with revenue growing to $12.83 billion, up 29% year-over-year. Most of its sales growth was contributed by strong sales of electronics and other general merchandise, which grew around 41% in the North American markets and 34% in international markets.

However, its operating margins were driven into the ground yet again due to margin pressures as it continues its aggressive expansion spree and continues to take a hit on the Kindle device sales. Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL). [1]

See our full analysis for Amazon’s stock here

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Media sales to drive revenue growth

Amazon’s media sales, which comprises e-content, books, DVDs and music, grew 13% this quarter, with most sales coming from North America. Given Amazon’s heavy investments in the Kindle, we expect e-content sales to increase significantly, going forward, and drive revenue growth for Amazon. The rapidly growing smartphone and tablet user base should also help drive e-content sales, directly benefiting Amazon – one of the leaders in the space. Amazon is reportedly planning to launch multiple new variants of the Kindle next quarter, which should further drive digital content sales.

Amazon continues to add books as well as audio and video streaming content to its Kindle store, Instant Video streaming, Appstore and other digital content offerings. Amazon Prime has evolved into a mammoth digital content service, with more than 18,000 movies and TV episodes available for unlimited streaming, and the Kindle Lending Library with 170,000 books. Prime enables Amazon to generate a steady stream of revenue from its loyal users and to boost sales by offering quick, free shipping.

Cloud!

Amazon Web Services is the fastest growing business of the company with year-over-year growth of around 54%, but it still accounts for just a fraction of its total revenue. Going forward, we expect it to continue to grow and become a dominant cloud platform globally. New initiatives like CloudSearch and the AWS Marketplace could help Amazon cement its position as the market leader in the cloud space.

Pressure on margins

Amazon has already taken a hit to its margins due to rapid expansion and low-margin Kindle sales. Operating margin dipped to around 0.8% last quarter. We expect the margins to improve, going forward, as e-content sales increase. The recent acquisition of Kiva Systems and its ongoing efforts to reduce operating expenses should also help it stem the decline in margins, and maybe even improve them a bit. However, the margins may stay at the current depressed levels in the near future as it will launch new variants of the Kindle Fire next quarter.

Even a marginal increase in Amazon’s adjusted margins would significantly boost its value as Amazon currently has razor-thin margins. You can check the impact of that using the chart below.

We have a $220 Trefis price estimate for Amazon, which stands near its market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. AMAZON.COM ANNOUNCES SECOND QUARTER SALES UP 29% TO $12.83 BILLION, SEC []