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Is Amazon Too Big To Fail?

Posted on Tuesday, May 5th 2020

Where most companies are facing the heat on account of the global virus-inflicted lockdown, Amazon (NASDAQ: AMZN) is seeing strong growth. The stock recently climbed to 52-week high levels as the company continues to scale up to meet increasing e-commerce and cloud computing demands.

Amazon’s Financials

Amazon recently reported its first quarter results where revenues grew 26% to $75.5 billion, ahead of the market’s forecast of $73.61 billion. Net income of $5.01 per share was lower than the Street’s forecast of $6.25 per share.

By segment, net product sales grew 22% from $34.3 billion last year to $41.8 billion and net service sales increased 32% from $25.4 billion to $33.6 billion.

North American sales grew 29% to $46.1 billion, while international sales grew 18% to $19.1 billion.

Revenues from Amazon Web Services (AWS) surpassed the $10 billion milestone. Subscription services revenues grew 28% to $5.56 billion as Amazon ended the quarter with over 150 million paid Prime members. Revenues from “other” category which primarily includes advertising grew 44% to $3.91 billion.

For the second quarter, Amazon expects net sales to grow between 18%-28% to $75-$81 billion. Net income is expected to between a loss of $1.5 billion to positive $1.5 billion due to coronavirus costs. The market was looking for $78 billion in revenues from the current quarter.

Under normal conditions, Amazon would have earned $4 billion in operating profits and it is planning to invest all of that to address coronavirus-related expenses in the current quarter. Some of these expenses pertain to procuring personal protective equipment for its workers, enhanced cleaning of facilities, lesser efficient process paths to allow for effective social distancing, higher wages for hourly teams, and hundreds of millions to develop their own COVID-19 testing capabilities.

Amazon’s Cloud Business

AWS remains the market leader in cloud services. According to a report by Canalys, AWS’s share of the cloud market for the first quarter of the year slipped marginally to 32% from 33% a year ago. During the same period, Microsoft’s Azure services share improved from 15% to 17%. Azure also delivered an impressive 59% growth over the year – suggesting that the competitors are slowly eating into Amazon’s share. For Amazon, growth has slowed down – but that is also on account of the fact that AWS is now a $10.22 billion segment. Last quarter, Amazon had reported a 34% growth compared with the 33% growth reported this quarter. A year ago, AWS was growing at over 40%.

AWS is hoping to address that concern by additional investments in upgrades and datacenters. Last quarter, it announced the opening of the AWS Europe (Milan) and AWS Africa (Cape Town) Regions. AWS is now available in 76 zones within 24 geographic regions and plans to extend to three more AWS Regions in Indonesia, Japan, and Spain.

AWS recently announced the general availability of Amazon Detective, a security service that makes it easy for customers to conduct faster and more efficient investigations into security issues across their AWS workloads. It collects log data from a customer’s resources and uses machine learning, statistical analysis, and graph theory to build interactive visualizations that can help organizations analyze, investigate, and quickly identify the root cause of potential security issues or suspicious activities.

Within databases, it announced the general availability of Amazon Keyspaces for Apache Cassandra, a scalable, and fully managed database service for Cassandra workloads that supports Apache 2.0 licensed drivers and developer tools. Amazon Keyspaces will allow customers to migrate on-premises Cassandra workloads to the cloud, without having to provision, configure, and operate servers or large Cassandra clusters. For app development, it announced Amazon AppFlow, a fully managed service that allows for easy access to customers to create and automate bidirectional data flows between AWS and SaaS applications without writing custom integration code.

AWS is also investing in AI and announced the general availability of Amazon Augmented Artificial Intelligence (Amazon A2I), which is a fully managed service that simplifies the process of adding human review to ML predictions to enhance model and application accuracy by identifying and improving low confidence predictions.

Amazon Prime Growth

Amazon did not give much detail about the Prime membership, but it is also seeing strong growth within its e-commerce and Prime businesses. Within Prime Video it launched Prime Video Cinema in the US, the UK, and Germany, which is a premium movie rental service that allows customers to stream in-theater movies at home. The current lockdown conditions do not allow consumers to view movies in a theater and online streaming is becoming more useful. Some of the titles released on this service include Birds of Prey, Emma, The Invisible Man, and Trolls World Tour. The service will allow consumers in these countries to rent or buy video titles directly from the Prime Video app on Apple devices and get access to new release movies.

Prime Video entered into a multi-year agreement with the National Football League (NFL) to allow for a live digital stream of 11 Thursday Night Football games as well as exclusive global streaming rights to one additional regular season game.

I think Amazon has reached a scale where it has become too big to fail. Like other parts of the economy, it too has some systemic risks, but given its sheer size, all efforts will be put in to save the company. For instance, recently there was a big Human Resource risk when its warehouse workers expressed their dissatisfaction over working conditions in the company. If more than 100,000 of these warehouse workers were to go on strike, governments themselves will step in to save them. There are similar such risks in its other segments, for instance, Cyber Security Risk involved for AWS that boasts of nearly a third of the global cloud market share. For the eCommerce segment, that accounts for a third of the US e-commerce GMV.

Its stock is trading at $2,286.04 with a market capitalization of $1.14 trillion. It had touched a 52-week high of $2,475 last week. It had fallen to a 52-week low of $1,626.03 in September last year.

Photo Credit: simone.brunozzi/Flickr.com

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