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Alex Kimani

Alex Kimani

Writer, Safehaven.com

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Amazon Sees Largest Quarterly Profit In History

Amazon

Hitherto, the FAANG group of media and internet stocks had been a monolith of performance, and trying to pick your favorite was like asking a parent to choose their favorite child.

But that has changed after a pair of disastrous Q2 reports by Netflix Inc. (NASDAQ:NFLX) and Facebook Inc. (NASDAQ:FB) that nearly turned the much-ballyhooed quintet into tech’s laughing stock (pun intended).

Luckily, picking your favorite FAANG stock has just become lot easier…

Amazon Inc. (NASDAQ:AMZN) stock zoomed to an all-time high of $1,880.05 on Thursday in after-market trading after the company reported Q2 earnings that more than doubled the consensus on Wall Street.

The online retailer earned $5.07 per share (GAAP) during the second quarter, well above the $2.48 that analysts were expecting. The huge profit beat allowed Amazon to get an out of jail free card after posting revenue of $52.9B (+39.4% Y/Y), $470M below the consensus.

Biggest Quarterly Profit in History

Amazon gave a simple reason for its record quarterly profit—a surge in profitability by its ecommerce segment.

Amazon has largely been relying on its AWS cloud service to provide the bulk of profits—sometimes as more than 60 percent of operating profits, despite accounting for just a small part of its revenue. During the last quarter, AWS brought in $6.1B revenue, which works out to only 11.5 percent of Amazon’s overall revenue. The cloud business reported a still-impressive operating profit of $1.64B (54.7percent of total), but  accounted for a noticeably smaller share of the total. Related: UK Motorists Not Interested In EVs

The retail segment is notorious for razor-thin margins thanks to Amazon’s penchant for cutting prices to the bone and providing freebies like free shipping. But something seems to have changed—in a very good way.

The company reported net income of $2.5 billion, the first time it has crossed the $2-billion profit mark in a quarter. Of that impressive figure, $1.34B came from the retail business, blowing away expectations for $240M.

A big part of that outperformance came from the Amazon’s North America operations where the company reported operating profit of $1.84B, more than four times the $436M recorded during last year’s comparable period and way above the $1.04B that analysts were modeling for.

The company’s international retail operations continued lagging after posting an operating loss of $494M--though still a considerable improvement from the $724M loss the segment posted during Q2 2017 and the $797M loss that Wall Street was expecting.

When queried about the surprise increase in retail profits, Chief Financial Officer Brian Olsavsky cited several factors, including better-than-expected efficiencies in infrastructure costs and other fixed costs, online-ad sales, and a high-margin business (that the company did not divulge).

The company also noted that its pace of hiring had slowed down considerably compared to a year ago.

More Goodies from Amazon Prime

During the last earnings call, Amazon announced a price hike for Amazon Prime from $99 to $119. Prime offers several perks including free shipping and video streaming. The increase was to take effect from May 11, around midway through the second quarter so that will factor fully during the third quarter.

Related: Twitter In A Tailspin On Disappointing Earnings Report

Further, the company announced that it had signed lots of new Prime members during Prime Day sale on July 16, though it did not disclose the exact figure. That will also give a nice boost to future earnings. The company had earlier announced that Prime members had crossed 100 million.

Amazon issued third-quarter revenue guidance of $54 billion-$57.5 billion, slightly below Wall Street consensus of $58.07, and operating income of $1.4 billion to $2.4 billion, way higher than the consensus of $1.25 billion.

Despite the mixed guidance, one thing’s for sure–the surge in profitability has ushered in a new era for Amazon stock and given it more room to run given its now much fairer valuation.

By Alex Kimani for Safehaven.com

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