An increase in capital expenditures, sales and marketing costs, and research and development expenses took a toll on the net profit of e-commerce giant Amazon.Com Inc (NASDAQ: AMZN), which reported its fiscal 2017 second-quarter results in the last week of July. The stock, which has lost over $100 in the past ten days to close at $982.01 yesterday, is expected to recover in the short-term due to the reasons mentioned below.
The Washington-based company reported a 25% increase in the second-quarter 2017 total net sales to $37.955 billion, from $30.404 billion in the corresponding quarter of 2016. Net service sales increased $3.92 billion to $13.21 billion, while net product sales increased $3.62 billion to $24.75 billion in 2Q17.
An $8.20 billion y-o-y increase in the operating expenses resulted in a 77% decline in the Q2 2017 net profit to $197 million, or $0.40 per share, from $857 million, or $1.78 per share, in Q2 2016. The Street Consensus was earnings of $1.42 per share on revenues of $37.18 billion.
Amazon Web Services (AWS), the cloud business of the company, generated revenue of $4.1 billion, versus FactSet expectations of $4.08 billion. AWS recorded a 42% y-o-y growth and generated an operating income of $916 million.
The amount spent on fulfillment centers –the amount spent to fulfill orders placed by clients on its e-commerce platform – increased 33% to $5.16 billion. Likewise, expenses on content and technology rose 43% to $5.55 billion. Those two expenses resulted in a sharp decline in the second-quarter net income.
For the current quarter, Amazon anticipates revenue of between $39.25 billion and $41.75 billion. That translates to a growth of 20% to 28% from the year-ago quarter. Currently, the Zacks revenue Consensus is $40 billion. The company also announced that it expects an operating loss of $400 million to an operating profit of $300 million in the third quarter.
Amazon stated that it would continue to invest heavily to achieve solid revenue growth. The company also clarified that it has issued lower operating income guidance mainly because of the preparations that are to be made for the holiday season.
During the second quarter, the company entered into an agreement to acquire Whole Foods for $14 billion. Additionally, Amazon, which became a leader in the home-assistance device business, also launched a new range of Echo devices. The company has also launched a Prime Now service in Singapore. More importantly, Amazon is exploring opportunities in the healthcare and pharmaceutical industry.
According to Michael Yoshikami, founder of Destination Wealth Management, Amazon is least bothered about net profits and is concentrating on improving top-line growth and market share. In this regard, the company has certainly succeeded in achieving its objective. Thus, fundamentally, solid second-quarter revenue growth and efforts taken to increase market share make the stock a must buy in dips.
Technically, the stock has not violated the ascending trend line, as shown in the image below. On the upside, next major resistance exists at 1012. Furthermore, the stochastic oscillator is in the oversold region. Thus, a short-term bullish reversal is expected in the stock.
To benefit from the uptrend, a call option may be bought by us from any of the listed reliable brokers. We would go ahead only if an expiry date around August 18th is available for the call option. Finally, a strike price of about $980 looks suitable for the trade.
Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.
