Amazon: Standing On The Shoulders Of U.S. Consumers

| About: Amazon.com, Inc. (AMZN)

Summary

AMZN's strong Q2 preps the company for a robust second half on the back of rising consumer spending and FBA adoption.

Prime penetration remains resilient and AWS continues to take share away from rivals.

Remain bullish on AMZN due to the secular growth in NA ecommerce.

Amazon (NASDAQ:AMZN) does not disappoint when it comes to proving itself to be moving in the right direction even if it means to sacrifice near-term shareholder value for the long-term gain. The company's Q2 earnings certainly showed this much with revenue accelerating for the third consecutive quarter, operating margin reaching the highest in six years, AWS continues to take shares from less competitive telco and cablecos, ongoing strength in the Prime ecosystem and positive free cash trends. All these factors appear to be setting AMZN up for another strong Q4 later in the years as the company's operating model scales up on the back of rising ecommerce penetration in North America. Investors often forget how well AMZN can scale but this quarter is certainly a reminder to all investors that the prior investments in logistics, Prime and AWS are all starting to flow through the P&L. That said, I remain bullish on AMZN's medium-term outlook but also want to acknowledge that long-term outlook depends on whether AMZN can compete against Alibaba (NYSE:BABA) on a global scale.

Revenue of $30.4b, +31% y/y, and EPS of $1.78 were both ahead of consensus. North America revenue growth of +28% was impressive as AMZN continues to take share away from offline retailers and sign up additional Prime members, and I continue to see positive momentum in North America after the recent GDP number that showed consumer spending growth of +4.2%, which was the best pace since late 2014. The macro backdrop is in favor of AMZN's near-term growth with Atlanta Fed's GDP now estimating that real consumer spending is on track to achieve the best growth in the decade at 4-5%. In order to appreciate this growth outlook investors should consider that income growth remains resilient due to higher wages (which offsets the moderating job growth) and deleveraging in households judging by the decline in household debt to disposable income ratio over the past decade. As a result, re-leveraging appears to be in play and this bodes well for AMZN as much of the spending (via credit cards) is likely to be done online.

On AWS, revenue growth of +58% to $2.9b was impressive and this should come as no surprise given the recent weakness we have observed from the slowing enterprise growth amongst the telecom and cable companies. Notably, Cogeco Cable, a Canadian cable company based in Quebec, wrote down C$450m of its enterprise segment soon after AMZN established AWS in Montreal. Clearly AWS is gaining ground against the less competitive peers and I see this trend to be sustainable in the coming quarters.

Finally, Prime adoption remains resilient in the wake of AMZN's Prime Day (see - Amazon: Primed For Growth). Notably, Prime is now in more than 40 areas globally and AMZN continues to expand its presence in Europe and India with same-day shipping offered in select metro areas. Management commented that order patterns remain strong and the increasing number of FBA makes Prime even more compelling due to broader selection of products. I believe that AMZN has created a virtuous cycle with Prime adoption and I continue to be bullish on this outlook.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.