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Shares of Amazon.com, Inc. (NASDAQ:AMZN) got hammered on Friday, falling about 3% after the e-commerce giant reported a huge bottom-line miss in its second quarter earnings result after the market close Thursday. But selling AMZN stock, which I expect to rise to $1,200 by year’s end, would be a foolish mistake.
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AMZN CEO Jeff Bezos has built his company and his wealth by embracing risk. Those “risks” — if you chose to describe them as such — have been more like investments and have cost a lot of money. Given that Bezos rose briefly to become the world’s richest person on Thursday, those investments have paid off.
So why would he suddenly shift from his “if we build it, they will come” strategy now? AMZN is building for the next decade. To that end, the company’s second-quarter earnings results and third-quarter guidance — though to the dismay of investors — is secondary.
In the three months that ended June, Amazon reported net income of $197 million, or 40 cents per share, on revenue of $38 billion. The bottom-line number comes out to a year-over-year drop of 77%; the revenue number grew 25% year over year. Wall Street expected AMZN to report earnings of $1.41 per share on $37.2 billion in revenue. The company’s spending (investments) cut into its profit. Fulfillment costs — what it spends to pull-and-pack customers’ orders on its e-commerce platform — climbed 33%, while spending on technology and content grew 43%.
“Our teams remain heads-down and focused on customers,” Bezos said in a statement. “It’s energizing to invent on behalf of customers, and we continue to see many high-quality opportunities to invest.”
Betting on The Future
Some of those investments include the recently launched Echo Show, which features calling and messaging capabilities via Alexa Echo devices. Also included in the list is Inside Edge — Amazon’s first Indian Original series — on Prime Video. There’s the Amazon Channels launched in both the U.K. and Germany. Oh, the company also debuted four new Fire tablets, expanded Amazon Fresh to Germany, launched Prime Now in Singapore, saw the take-off of its 25th Prime Air plane, and hired more than 30,000 new employees — all of which costs money.
Overall operating expenses rose 28.2% year over year and 7.5% sequentially. Wall Street, which hates the amount of money AMZN spends to grow its e-commerce empire, was clearly disappointed by these results. The company’s Q3 profit guidance of negative $400 million to $376 million, versus Street consensus of $950 million, suggest there will be more of the same. But that level of spending is not unusual for Amazon, which tends to ramp up as it prepares for the holiday shopping season.