Amazon Q2A – Disciplinary matters

Amazon’s prioritisation of customers over investors shows no sign of abating.

• Amazon reported in-line Q2A results but guided very badly for Q3E as it continues to invest heavily in the growth at the expense of profitability.
• Q214A revenues / EPS were $19.3bn / LOSS $0.27 compared to forecasts of $19.4bn and LOSS $0.13 respectively.
• The EPS surprise was not derived from operating as adjusted EBIT was $376m which was in line with expectations of $380m.
• The real problem was to found in the guidance where Amazon continues to spend as much as it possibly can on expanding its operations and driving user loyalty.
• Q314E guidance is for revenues of $19.7bn-$21.5bn ($20.6bn) and adjusted EBIT of $0m – LOSS $400m. (LOSS $200m midpoint).
• Consensus was looking for revenues of $20.8bn in revenues and $309 in adjusted EBIT some $509m worse than expected.
• With a sky high valuation, there is no room whatsoever for error and the market sent the shares down 10% in after-hours trading.
• Amazon has a unique retail proposition and cloud proposition but its inability to turn a profit is starting to be a major issue.
• Furthermore, its digital strategy looks to me to be a series of very expensive experiments which have not been properly thought through (see here and here).
• A cursory glance through the financial statements also reveals that Amazon has spent a massive $1.4bn on corporate office space in the last quarter alone.
• Buying spanking new offices is one of the biggest signs of inadequate fiscal discipline.
• This, combined with the inability to turn a profit and the fuzzy thinking that surrounds digital, makes me very worried that money is being frittered away.
• I believe strongly in investment for growth but the kind of concerns that this report highlights, keeps me well away from the shares until I can see some dimes in investors’ pockets.