• Reinhardt Coetzee


In a span of two decades, AMZN has gone from being the world’s largest bookstore to among the largest conglomerates with major business interests in eCommerce, cloud computing, media, content, and artificial intelligence. So much so, that AMZN’s online sales accounted for only half of its revenue in 2019. In the last 10 years, AMZN’s revenue has shot up ~11X, from $24.5 billion in 2009 to $280.5 billion in 2019. Its free cash flows have been equally impressive growing ~12X within the same period.

◾2Q20 results: Largest profit in the company’s history

AMZN reported 2Q20 revenue at ~$88.9bn (up 40.2% YoY), beating last year’s 2Q revenue of $63.4bn. The growth was well-rounded with North America revenues increasing 43.4% YoY to $55.4bn and International revenues rising 38.5% YoY to $22.7bn. The Amazon Web Services (AWS) segment reported revenues at $10.8bn, up 29% YoY.

The company reported gross margins of 40.8% vs. 42.8% in 2Q19. The margin decline was primarily on account of higher shipping costs which rose 68% YoY to $13.6bn, as AMZN focused on making 1-day shipping the norm for all Prime related activities.

Despite the pandemic, AMZN increased its 2Q20 operating income by 89.5% YoY to $5.8bn while its net income doubled YoY to $5.2bn, largest in its 26 years history. The company also reported positive income of $345mn from international operations ($601mn loss in 2Q19) driven by a surge in demand for online shopping and acceleration in adoption of Prime benefits in Europe, India, and Japan. These figures are quite impressive as the company incurred incremental costs of $4bn related to COVID-19 safety measures for employees and customers.

◾AWS is expected to grow even more

AMZN is the global leader in cloud computing. Revenue from AWS touched $10.8bn in 2Q20, up 29% YoY, though it is a first-ever sub-30% growth since providing AWS numbers. The segment operating income increased 58.3% YoY to $3.4bn, with margins back at 3Q18 levels of 31.1% (25.3% in 2Q19), due to lower cost of deliveries and additional benefit from recent accounting changes under which server depreciation costs are now being spread over four years vs. three years previously. The improved margins will help AMZN to be more aggressive with pricing and marketing expenses as competition from Google and Microsoft increases.

Despite the recent headwinds due to pandemic and economic slowdown, the contract activity remained strong. The AWS backlog rose to 65% YoY and the average contract length is at ~3 years. Expect the current environment to be a trigger for greater adoption of cloud technology and see recovery in IT budgets as companies are increasingly scaling up their IT infrastructure to help shift their workers to virtual environments.

◾eCommerce likely to increase but physical retail to dive

In 2Q20, AMZN’s sales from online stores grew 47.8% YoY to $45.9bn, driven by elevated demand. The company increased its grocery delivery capacity by 160% and tripled grocery pickup locations leading to a 3x increase in revenue from grocery sales compared to last year. The revenue from third-party seller services was reported at $18.2bn, up 52.1% YoY (30% in 1Q20), driven by increased seller enrolments across all geographies. In India, AMZN pledged $1bn to help Medium and Small businesses become digitally enabled and launched “Local Shops” to let shopkeepers and retailers with physical stores serve more customers from their local areas. Since its launch, the company said more than 11,000 sellers have enrolled in the program.

Expect the boost to eCommerce to continue, however, the revenue mix is going to change as orders of non-essential items are likely to see a decline. Sales in physical stores such as Amazon Go and Whole Foods are likely to plummet given lockdown restrictions and general reluctance to step out. However, Amazon Pantry and Amazon Fresh which delivers groceries, packaged foods, and household staples are likely to see increased demand as people increasingly shop online.

AMZN is also witnessing upticks in advertising spend from third-party sellers on its platform. Advertising spend increased to $4.2bn in 2Q20, a 40.6% YoY increase (up 8% QoQ), and the trend is likely to continue going forward given the huge direct buyer traffic that the site receives.

◾Continued focus on R&D and inorganic growth

AMZN is a global frontrunner in technology development and has spent over $100bn in R&D and net $20bn on acquisitions, over the last 5 years. It has invested in a wide range of technologies including artificial intelligence, cloud infrastructure, home solutions, transportation, and logistics.

Investment in infrastructure such as logistics and cloud computing has stabilized, and the proportion of high-margin businesses such as AWS, online advertising, and subscription services continues to increase. Expect AMZN to benefit from the significant acceleration of consumers towards the online retail market, particularly outside North America.

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Stock returns for portfolio and individual  trade returns correct as of 2022/02/03

© 2022 by reinhardtcoetzee.com

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