Three Big Takeaways From Amazon’s Q2 Financial Results
Amazon’s heavy-spending ways may finally be wearing on investors’ patience. Jeff Bezos’s company met Wall Street expectations on revenue growth in the second quarter but disclosed a much larger than expected loss when it reported its financial results yesterday. As a result, Amazon’s stock, which was already down close to 10 percent on the year, is trading down another 11 percent since yesterday’s market close at about $319 a share.
Here are three of the key takeaways from the financial results that have much of Wall Street talking this morning.
1. Amazon Web Services price cuts are hurting its top-line growth.
Amazon’s AWS cloud computing business has appeared to be Amazon’s fastest-growing unit in recent quarters. But a series of price cuts, ranging from 28 percent to 51 percent, are finally becoming visible in AWS’ top-line results. Revenue growth for Amazon’s “other” category of businesses, of which Amazon Web Services contributes the most revenue, decelerated considerably in the second quarter. North American revenue for the category grew 38 percent year over year in the quarter, compared to 60 percent growth in the first quarter. In the year-ago quarter, the “other” category posted revenue growth of 64 percent.
CFO Tom Szkutak admitted that the price cuts are the cause for the slowdown in growth, but said the company believes they will help AWS take market share in the long run. He also said that AWS usage growth — a measure he compared to unit growth in its retail business — was still strong at around 90 percent year over year.
2. Amazon really wants Hollywood to know it’s taking its video business seriously.
How do you convince Hollywood types to pay attention to you when you don’t have breakaway hits like “House of Cards”? Show them the size of your budget, of course. Amazon told analysts in yesterday’s earnings call that it will spend “significantly” more on its overall video business in the current quarter versus last quarter. A growing piece of that business, it said, is Amazon’s original programming efforts — new shows it pays to develop and which it hopes will help its video offering stand out from its competitors. Amazon said it will spend more than $100 million on it in the current quarter as it develops its next batch of green-lit pilot shows into full-length series.
Amazon is still likely spending much less on its shows than rival Netflix, though. Netflix spent more than $100 million alone on two seasons of “House of Cards,” and says it expects to be spending more than 10 percent of its programming budget on originals soon.
3. Amazon’s current investment cycle is going to last longer than most analysts expected.
Amazon is still spending big on a series of initiatives that may not pay off for years down the road. Among its big, expensive bets: Aggressive hiring and tech upgrades in AWS; continued buildout of its network of warehouses, both domestically and abroad, with a focus on China; the production and marketing for new devices such as the Fire TV and Fire phone; and the aforementioned spending on its new video-programming push.
As a result, analysts are looking for answers on when Amazon may stop funneling profits from mature businesses into spending on long-term bets. Not so surprisingly, Amazon isn’t answering that question. Szkutak admitted the obvious to analysts on yesterday’s call — that Amazon is in the midst of a multi-year investment cycle — but gave no hints as to when (if?) this wave of spending may end.
Several equity research outfits lowered their stock price targets for Amazon this morning, but their analysts still largely believe that this investment cycle will pay off … someday.