Amazon’s Value Surpasses Wal-Mart After Surprise 2Q Profit

24 Jul 2015 | Author: | No comments yet »

Amazon Soars Past Wal-Mart: Price Targets Zoom Despite a Promise of ‘Lumpy’ Profits.

Shares of Amazon.com (AMZN) are up $74.39, or 15%, at $556.57, after the company yesterday beat Q2 revenue and delivered a surprise profit where analysts had expected a net loss.

It was actually released without much fanfare back in March, but is getting attention now because of the marketing push around Amazon Prime Day, the company’s attempt to create a Black Friday-style retail frenzy in the run-up to back-to-school season. The reasons that Amazon is pushing the card are clear: For one thing, by adding new Prime membership perks, it hopes to gain more Prime members, at $99 a year each. Perhaps less obviously, Amazon pays lower interchange fees to transaction processing companies for purchases made using the Prime Store Card than it does on those made using a traditional Visa, MasterCard, or AmEx.

Besides seeing Amazon’s constant currency revenue growth rate accelerate from 22% in the March quarter to 27% in the June quarter the company reported its highest non-GAAP operating margin of 4.4% since at least 2011 (the earliest that I have my model detailed by quarter). Investors are also looking at how much Amazon beat its June quarter operating income guidance by (actual of $1.03 billion vs. a guidance range of $100 to $650 million) and ratcheting up their second half projections.

While the card doesn’t technically have an annual fee, you have to pony up nearly $100 bucks a year for the two-day shipping and media streaming service. Below is a chart from Amazon’s presentation that shows how its trailing twelve months free cash flow has increased from just over $1 billion a year ago to almost $4.4 billion in this quarter.

But there’s a catch on this: If the purchase isn’t paid off at the end of that period, you’ll be “assessed on the promotional balance from the date of the purchase,” according to the card’s terms and conditions. In 2013 they were 27.2% (up 240 basis points), in 2014 they were 29.7% (up 250 basis points) and for the first half this year they have averaged about 33.5%, a huge jump of 380 basis points if it is sustained in the second half this year. But we’re also investing in large opportunities that are in front of us, particularly in Marketplace, Prime and AWS […] We will continue to invest in the businesses that we think fit that profile, and we’re always looking for a fourth or fifth business that fits that profile.

Also, don’t expect a normal-looking piece of plastic if you’re approved. “The card itself is made out of paper, like an auto insurance card,” says NerdWallet’s Sean McQuay. Re/Code’s Kara Swisher was on CNBC a short while ago, and the way she characterized the $92 million net profit was “I think they’re screwing with you a bit,” meaning Amazon’s fashion of teasing Wall Street and the media with occasional flashes of profit. “Jeff Bezos has that $92 million in his desk drawer,” Swisher pointed out. The other focus, of course, was 81% growth in Amazon’s cloud computing business, which, at nearly $8 billion in annual revenue, lang growing 81%, dazzles most everyone. To get 5% back on all purchases at a store as varied as Amazon is a great deal.” Other cards do allow you to save money on Amazon purchases, but with more restrictions. He also lifts his 2015 profit view to $2.07 per share from 41 cents previously. ” We are particularly impressed by the improvement in the company’s gross margin.

Corporate GM hit 34.6% (above our 32.2% estimate and 32.2% in FQ1) and exceeded expectations due to 1.) greater 3P (45% of paid units, up from 41% in FQ1 and 41% a year ago), 2.) strong AWS sales (AWS revenue of $1.8B grew by 81% Y/Y, much faster than $1.57, up 56% Y/Y consensus estimate), and 3.) lower shipping costs (4.1% of net sales vs. 4.4% in FQ1 and 4.8% a year ago) […] Note that AWS operating margin expanded yet again to 21.4%, up 5pp Q/Q and up 14pp Y/Y, and we see further upside to AWS’ operating margin going forward. And if you’re a heavy user who spends $200 a month at Amazon, using the card will earn you enough to cover the cost of Prime with some cash left over. He raises his 2015 EPS estimate to $3.03 from $1.01 per share. “Top-line reacceleration and expanding gross margins were driven by 1) anniversary of headwinds in Int’l (Japan), 2) comping of AWS price cuts, and 3) continued contraction of shipping loss margins as on the Prime rate hike as well as benefits from earlier investment in FC infrastructure. While the ability to pay for a big purchase without interest for at least half a year sounds appealing, you’ll end up with a much larger bill than you bargained for if you don’t pay off your new television on time. Matthew Goldman, the chief executive of credit card rewards site Wallaby Financial, received a credit limit that was a fraction of what he was offered on his other cards.

Moreover, using up a large portion of the available credit on an individual card can harm your overall credit score, says Goldman, making it more expensive to borrow in the future. Only apply for this card if you are already a Prime member who shops at Amazon frequently, doesn’t carry a balance and can hold yourself to spending about 20% to 30% of your available credit each month. His EPS estimate for this year goes to $1.60 from 26 cents. “CSOI margins have been expanding on YoY basis for the past three quarters, and are likely to improve in 3Q’15.

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