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Shares of Amazon, the world leader in e-commerce, fell 7% recently, after the company announced a revenue number many found disappointing. In the second quarter, Amazon (NASDAQ: AMZN) reported that its revenue had hit $113.1 billion. In year-on-year terms, this compares to the analogous number of 2Q 2020 of $88.9 billion.
In quarter-on-quarter terms, 2Q 2021 improved on 1Q 2021 by 24%, excluding a $2.5 billion favorable impact from changes in foreign exchange rates.
A Disappointing Revenue Number .
Even when it hit and exceeded a consensus number Amazon seems to have been unable to catch a break. Consider earnings per share, expected versus actual. The consensus forecast was an EPS of $12.22. The reported EPS beat that. It was $15.12. This was a surprise, on the upside, of 23.73%.
Traders were unimpressed. They were concerned, rather, with that disappointing number for revenue, and with what they think it means, that the fading of the pandemic has revived foot traffic into brick-and-mortar stores, many of which people can now frequent without wearing a mask. This means more competition for online commerce. Even more broadly it means people who, stuck in their homes, had nothing to do other than shop, now have lots else to do.
That, traders and analysts reason, must be bad news for Amazon.
Stock Price Reaction
The numbers came out after close of trading last week. All eyes turned to NASDAQ to get a sense of the market’s reaction. It was a hefty downward move.
Amazon closed last Thursday at $3599.92. It opened the following morning about $250 below that, at $3347.95. Its low for the day was $3306.98 and it closed at $3327.59.
This raises the question: Is this a buying opportunity? Has the market’s reaction created a desirable bargain basement?
How Amazon Makes Money
Retailing, of almost anything, is a hotly competitive business. Lots of people and institutions want to sell you books, or pet food, or office supplies, and most of them will happily do so either at a brick-and-mortar or online. Profit margins, then, are paper thin.
The fates of RadioShack, Payless Shoes, and Toys R Us all illustrate that neither scale nor name recognition can save a retailer from the risks that come with these low margins.
Amazon is in a strong position because it is so much more than a retailer. Its ingenuity in finding ways to use its name and scale to find revenue streams with high margins is reflected especially in Amazon Web Services (AWS), its on-demand cloud computing platform.
Businesses, even very large ones that could afford their own servers, etc., discovered in the first decade of this millennium that instead of buying, owning, and maintaining data centers and servers, they could access what those internet infrastructure things do. They could buy computing power, storage, and databases all on an as-needed basis. They started talking of this as their business in ‘the cloud.’
Amazon had the scale to start renting out ‘space’ in this metaphorical cloud, and let customers avoid fixed capital costs for a variable expense. As AWS’ website explains, these customers for its cloud services range from healthcare companies that need computing power to personalize treatment of their patients, to financial companies employing real-time fraud detection and prevention.
The latest figures confirm the impression that, despite recent moves by Google/Alphabet and Microsoft, Amazon remains the king of public cloud services.
That, in turn, is one good reason that people who bought into the dip Friday might end up celebrating that date by next year.