Categories Analysis, Retail

After blockbuster Q2, Amazon (AMZN) is headed for a busy second half

To continue to spend on capacity expansion and development of fulfillment centers, to meet the growing demand

As the business world limps back to normalcy from the crisis set off by coronavirus, most e-commerce companies are going through a period of hectic activity, thanks to the spurt in online shopping amid the shelter-in-place orders. Obviously, the company that benefited most from the ‘new normal’ is e-tail giant Amazon, Inc. (NASDAQ: AMZN).

Also read: How Walmart stock stays resilient

There has been such a huge rush of orders – led by grocery and other consumer essentials –  that Amazon’s fulfillment centers are operating beyond their capacity, prompting the company to take measures to put things in order. With the supply chain under strain, it would be a challenging task to manage logistics and deliveries in a hassle-free manner, especially the quick-delivery services that play a key role in retaining customers.

Outstanding Performance

Earnings per share more than doubled to a whopping $10.3 and exceeded estimates in the June quarter, after revenues grew in double digits both in North America and the international market. Catalyzed by another decent performance by Amazon Web Services (AWS), the top-line surged to $89 billion and beat the Street view.

Post-earnings, investor sentiment has been at an all-time high. Analysts advise those who can afford Amazon’s stock to buy it. It carries an average target price of $3,644.49.

Amazon reports Q2 2020 earnings results

Responding to a question during his interaction with analysts this week, Amazon’s CFO Brian Olsavsky said, “…the average contract length is over three years for our AWS contracts. I would say, contract volume and negotiations are strong and have maintained through this period. It really does boil down to short-term versus long-term incentives here for a lot of our customers.”

As expected, customers kept away from Amazon’s physical outlets during the quarter, dragging down store sales significantly. Interestingly, the second quarter is considered to be the leanest period for the company’s retail business. When it comes to AWS, though enterprises are adopting cloud services like never before, demand remains moderate due to the reduction in capital spending and budgetary constraints.

Prime Day in Q4

In an indication that the second half of the year is going to be equally busy for the retailer, the management is doing preparations to hold this year’s Prime Day in the fourth quarter, instead of the usual third quarter. With third-party sales growing steadily, the company is set to raise the headcount further, continuing the hiring spree that began early this year.

There is no doubt that Amazon would come out of this unusual phase much stronger, with a more efficient delivery system and fulfillment centers. The customer base is expanding with a high level of Prime member engagement. So, there will be additional focus on inventory –to meet the high demand with the right balance of essential and non-essential items, given the shift in the sales trend since the onset of the epidemic. This assumes significance considering the modest profit the company generated from consumables and groceries.

“On the product side, a lot of what we saw in March and early April was sales of consumables and groceries and safety items. And we talked a lot about the fact that that was coming at pretty much zero cost — our zero profit when you factored in the COVID-related cost. We got better on our cost structure and we also resumed a more normal mix in, I’d say, early part of May. So since then, I would say it’s getting closer to what we call a more normal mix.”

Amazon’s chief financial officer Brian Olsavsky

Costs to Drag Margins

Meanwhile, elevated costs, mainly related to COVID-related safety measures and wages, will likely restrict margin growth. But that will be partially offset by the sharp reduction in marketing and travel expenses. Also, liquidity will remain under pressure due to heavy spending in infrastructure projects such as fulfillment centers and logistics. A segment that has kept a low profile all these days is Amazon Studios, and the trend would probably continue until normalcy returns to markets.

Interested in reading management/analysts’ comments on Amazon’s Q2 results? Click here

It has become routine for Amazon’s stock to set new records, scaling new heights after the company’s market cap crossed the $1-trillion mark earlier this year. The shares bounced back pretty quickly from the short-lived selloff in the early days of the pandemic, and reached a new high this month. They got another boost after the impressive earnings results and opened Friday’s session at 3,244.00.

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