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Big Box Stores vs. Amazon

Posted on Tuesday, Nov 3rd 2020

Despite the current global lockdown and weak economic conditions, Amazon (NASDAQ: AMZN) continued to deliver on all fronts. The pandemic conditions are accelerating growth not only in the cloud business but even in the eCommerce segment.

Amazon’s Financials

Amazon’s third-quarter revenues grew 37% to $96.14 billion, ahead of the market’s forecast of $92.61 billion. Net income of $12.37 per share was significantly higher than the Street’s forecast of $7.53 per share.

By segment, net product sales grew 32.9% to $52.8 billion from $39.7 billion a year ago. Net service sales increased 43.4% to $43.4 billion from $30.3 billion.

North American sales grew 39.2% to $59.4 billion, while international sales grew 37.2% to $25.2 billion.

Revenues from Amazon Web Services (AWS) increased by 29% to $11.6 billion. Subscription services revenues grew 33% to $6.6 billion. Revenue from the “other” segment which primarily includes advertising grew 51% to $5.4 billion.

Amazon expects fourth quarter revenues of $112-$121 billion with an operating income of $1-$4.5 billion. The market was looking for revenues of $112.3 billion for the quarter. The market was not too pleased with Amazon’s earnings outlook though. Amazon said that it will spend an estimated $4 billion on costs related to COVID-19 during the quarter and its operating profit would fall between $1-$4.5 billion, below the $5.81 billion Street estimate.

Amazon’s Cloud Business

During the quarter, AWS announced the general availability of several of its services. Amazon Timestream, a new time series database for IoT and operational applications, was released recently. Timestream can scale to trillions of time series events per day, up to 1,000 times faster than relational data bases, at a fraction of the cost. It provides a server-less database service, built to manage the scale and complexity of time series, website clickstream logs, and data center infrastructure so that customers can analyze more data easily and cost effectively.

It also announced the general availability of Amazon EBS io2, the next generation Provisioned IOPS SSD volumes for Amazon Elastic Block Store (EBS). The current upgrade has been designed for 100 times higher volume durability and makes the primary copy of customers’ data more resilient, resulting in better application availability. To ensure higher security, it released AWS Nitro Enclaves, a new capability that allows customers to create isolated compute environments within Amazon Elastic Compute Cloud (EC2) instances to process and protect highly sensitive data securely.

Amazon is also driving its cloud growth through partnerships. It recently tied up with Verizon to bring AWS Wavelength to additional customers across the United States. The service was released in Atlanta, Boston, New York City, the San Francisco Bay Area, and Washington DC. It will allow developers to build applications that deliver ultra-low latency to mobile devices by deploying AWS compute and storage at the edge of Verizon’s 5G network. It is also entering into similar agreements with other leading telecommunications providers, including Vodafone, SK Telecom, and KDDI, to launch Wavelength Zones across Europe, South Korea, and Japan in 2020 and beyond.

Amazon’s Retail Business

Analysts estimate that the global pandemic conditions will drive the e-commerce segment higher in the coming quarter. With lockdown conditions still underway, Morgan Stanley’s Brian Nowak estimates 9% global e-commerce growth this quarter. Amazon’s market share in the US is expected to grow from 33.5% in 2019 to around 37% in 2021. Even within international markets, he expects strong eCommerce adoption trends to continue.

Amazon appears to be on track to meet these high growth expectations. Earlier this month, Amazon announced its Prime-Day to kick off the holiday shopping season on October 13-14. Normally, Prime Day happens in July, but due to Covid, Amazon had rescheduled its event to October.

Despite the current pandemic, Prime Days ended up becoming the biggest Days ever for small and medium businesses in Amazon’s stores. Third-party sellers, most of which were small and medium businesses, sold over $3.5 billion worth of goods. This was bigger than Amazon’s retail business.

In India, Amazon followed suit with the Great India Festival on October 17. This is a month-long celebration with deals on categories including all electronics. It also hosted Prime Day in the country on August 6 and 7, and saw twice as many customers becoming Prime members as compared to the year before.

But other big box stores are trying to curb Amazon’s growth. Recently, Walmart and Target announced their version of the Prime Day sales on the same days as Amazon’s Prime Day sale. Walmart announced a Big Save online event that ran from October 11th to the 15th. Target also announced its Deal Days that ran from October 13th to the 14th and offered deals on items across electronics, home, toys, beauty, and other categories.

Both Walmart and Target are attracting customers by offering price match, curbside pick-up, same day pickup, and even expedited shipping. Services like Drive Up and curbside pickup are cheaper to run for the big box stores as they don’t have to incur the accompanying shipping costs. According to recent reports, Walmart’s US e-commerce sales grew 74% in the three months ending May this year and online sales at Target more than doubled during the pandemic, with e-commerce growing 282% in April alone. But to sustain this growth, expedited delivery options may not be enough to make a dent in Amazon’s business. These stores will have to do a lot more to lure customers away from Amazon’s convenient offering of shipping directly to their homes. Despite their significant reach, these retailers still do not have access to Amazon’s wide merchant network that provides Amazon access to an unlimited inventory of goods.

Its stock is trading at $3,004.48 with a market capitalization of $1.5 trillion. It had touched a 52-week high of $3,552.25 in August. It had fallen to a 52-week low of $1,626.03 in November last year.

Photo Credit: simone.brunozzi/Flickr.com

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