Should Amazon Remain One Company?

Summary

• Amazon's earnings missed estimates while revenue growth was strong. Its cloud segment AWS missed analyst sales estimates.
• Amazon is relentlessly getting into new markets and is juggling several product lines: e-commerce, cloud, video streaming, offline stores, and so on.
• It should explore whether it should continue to be one company.

Originally published July 29, 2019

Amazon (NASDAQ: AMZN) last week reported a mixed quarter. Its earnings missed estimates while revenue growth was strong. Its cloud segment AWS missed analyst sales estimates.

Amazon’s Financials

Amazon’s second quarter revenues grew 20% to $63.4 billion. Net income increased from $2.5 billion or $5.07 per share a year ago to $2.6 billion or $5.22 per share. Analysts expected earnings of $5.57 per share on revenue of $62.5 billion. Operating income increased to $3.1 billion, compared with $3 billion a year ago.

By segment, net product sales increased 12.5% to $35.8 billion and net service sales increased 30.9% to $27.5 billion. AWS revenues grew 37.7% over the year to $8.38 billion, missing analyst estimates of $8.5 billion. AWS generated operating income of $2.1 billion.

Revenue from subscription services like Prime increased 37% to $4.7 billion. Revenue from online stores grew 14% to $31.05 billion while revenue from physical stores, chiefly from its stores from the Whole Foods acquisition, was flat at $4.3 billion. Revenue from third party seller services including commission, fulfillment, and shipping fees grew 23% to $11.9 billion. Other revenue mainly from advertising grew 37% to $3 billion.

Amazon’s international sales grew 12% to $16.37 billion. However, losses widened 22% from $494 million to $601 million. North America net sales was $38.6 billion, up 20% and operating income was $1.5 billion, down 15%.

For the third quarter, Amazon expects sales to grow 17%-24% to be between $66 and $70 billion, compared to analyst estimates of $67.3 billion. Operating income is expected to be $2.1 billion to $3.1 billion, below estimates of $4.39 billion.

Amazon’s Acquisitions

Last month, Amazon’s video streaming platform Twitch is estimated to have paid up to $25 million for social networking platform Bebo. Founded in 2005, Bebo was acquired in 2008 by AOL for $850 million and by Criterion Capital for $25 million in 2010. In 2013, Bebo filed for bankruptcy protection and the original founders bought it back for $1 million and turned it into a destination for organizing and running tournaments for streamers. The acquisition is expected to help expand Twitch’s eSports platform and grow the Twitch Rivals tournament series.

A major acquisition this quarter was that of warehouse robotics startup Canvas for an undisclosed amount in April. Founded in 2015, the Colorado-based startup offers devices such as a fully autonomous cart system that taps into in-house software and 3D imaging to work like an autonomous car within a warehouse. Canvas Technology had raised $15 million, had estimated annual revenue of $5 million and a post-money valuation in the range of $50M to $100M in 2017. It competed with Fetch Robotics, 6 River Systems, and Locus Robotics.

The Canvas acquisition is expected to augment the person-to-goods workflow in Amazon’s warehouses. Amazon has built a robust robotics division since its $775 million acquisition in 2012 of Kiva Systems, whose automated material handling systems are used exclusively in Amazon’s fulfillment centers.

Early this year, Amazon unveiled its urban delivery robot called Scout that was apparently built after it acquired an urban delivery robot startup called Dispatch in 2017 for its IP and talent. Founded in 2015, Dispatch had raised $2 million in funding.

Advertising was also another strategic area for Amazon’s acquisitions this year. In June, it announced plans to acquire Sizmek’s ad serving and dynamic content optimization businesses. Founded in 1999, Sizmek had filed for bankruptcy in March and this deal is estimated to be worth less than $500 million. Its projected annual revenue in 2019 had fallen to $170 million, dropping below its debt of $172 million. It was acquired by Vector Capital for $122 million in 2016.

The Sizmek technology is expected to help Amazon provide advertisers with stronger targeting, the ability to plan one campaign and target ads to different audiences and the ability to buy products from Amazon within those ads.

Amazon’s Other revenue that is mainly from advertising grew 37% to $3 billion in the recent quarter. That is just 4.7% of its total revenue but 35.7% of AWS revenue. It certainly seems to be a segment worth watching especially since it could take on Google (GOOG) (GOOGL) and Facebook (FB), the biggies in advertising. Facebook recently reported $16.6 billion advertising revenue in its second quarter.

According to eMarketer, Amazon captured 6.8% of the US digital advertising market versus Google’s 38.2% share and Facebook’s 21.8% share. Amazon is expected to grow its share to 8.8% in 2019. Google’s share is expected to decline to 37.2% and Facebook is expected to rise to 22.1% in 2019.

During the quarter, Amazon integrated its $200 million acquisition of Israel-based cloud backup and disaster recovery company CloudEndure. CloudEndure provides disaster recovering and data migration services across AWS, Google (GOOG) Cloud Platform (GCP), Microsoft (MSFT) Azure, and VMware (VMW) and was an AWS Advanced Technology Partner since 2016. It was founded in 2012 and had raised $31.2 million in funding. It now offers all AWS customers and partners CloudEndure Migration to move applications from any physical, virtual, or cloud-based infrastructure to AWS at no charge.

According to Canalys, cloud infrastructure spend grew 46% to $80 billion in 2018. While AWS continues to dominate the market with 31.7% share, Microsoft (MSFT) Azure is second with 16.8% share. Azure is growing strong, gaining 3.3% market share in 2018 to reach 16.8% while AWS gained just 0.2%. Microsoft has also entered into a new partnership with Oracle earlier last month to allow customers to connect Azure services with Oracle (ORCL) cloud services.

Amazon is relentlessly getting into new markets and is juggling several product lines: e-commerce, cloud, video streaming, offline stores, and so on. It should explore whether it should continue to be one company.

Amazon’s stock touched a record high of $2050.50 in September and crossed $1 trillion in market cap but its stock is currently trading at $1943.05 with a market cap of $956.63 billion. Its 52-week low is $1307.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.