Thursday afternoon, e-commerce heavyweight Amazon (click ticker for report: ) reported mediocre second quarter results. Revenue increased 22% year-over-year to $15.7 billion, falling short of consensus estimates. Earnings per share swung to a loss of $0.02, which was also worse than consensus expectations. Free cash flow for the quarter was surprisingly positive at $25 million, equal to less than 1% of revenue.
Amazon remains firmly entrenched in “investment” mode, as the firm spent well over $800 million on internal investments during the second quarter. The company specifically cites spending on fulfillment centers and server infrastructure as well as continued investment in the Amazon Prime Instant stream. Within the not-so-distant future, we can envision an Amazon where same-day shipping is the norm.
On a geographic basis, revenue in North America continued to accelerate, growing 30% year-over-year to $9.5 billion. The firm is capitalizing on the popularity of the Kindle Fire to sell more units in North America than abroad. Third-party sales grew in-line with revenue, holding steady at roughly 40% of the product mix. Amazon continues to expand its product mix, making it the top web destination for North American consumers.
Internationally, Amazon hopes to see a boost from a more international rollout of the Kindle Fire, but revenue did not grow as quickly in this region, growing 13% year-over-year to $6.2 billion. The lack of digital distribution relative to the US is certainly one reason for the slower growth rate, as media sales actually fell year-over-year. Amazon’s business in India is still in its infancy, and it could certainly help drive revenue growth in the years to come.
On the cost side, increases are far outstripping revenue gains. Fulfillment expenses surged 35% year-over-year to $1.8 billion. Technology and content costs jumped 47% year-over-year to $1.5 billion, largely due to more data centers and streaming content. The hope is that these investments in the cost structure eventually lead to fixed cost leveraging, but such an event will require continued sales growth to come to fruition.
Going forward, the firm anticipates revenue of $15.45-$17.15 billion during the third quarter, an increase of 12%-24% year-over-year. Amazon also expects to lose between $65 million and $440 million for the period, slightly below consensus expectations.
Valuentum’s Take
Amazon is a revenue growth machine, particularly in North America. However, margins are razor-thin, and the firm is hardly generating any free cash flow on its tremendous amount of sales. Still, we believe the strategic investments in distribution infrastructure could eventually increase profitability at Amazon (over the long haul). All things considered, we do not like the current risk/reward in shares of the e-commerce giant (at the time of this writing), so we will not add shares to the portfolio of our Best Ideas Newsletter.