Given its many fingers in numerous pies, Amazon (NASDAQ:AMZN) is evolving into a master of all trades. The company reports seven distinct revenue segments for the year to date, with e-commerce continuing to account for the majority of revenues at 41.9 percent for the time being.
Physical stores account for 3.8 percent, third-party vendors for 22.5 percent, subscriptions for 7.1 percent, advertising for 7.2 percent, Amazon Web Services for 16.2 percent, and other sources for 0.8 percent. The complexity of Amazon’s many businesses and expansion plans would be very easy to overwhelm someone who only glanced over the company’s Q2 2022 news release.
Amazon Sales by Sector
In addition to its current Amazon Care and Pharmacy, it appears that AMZN is also highly optimistic about the future of primary care services with its most recent acquisition of One Medical (NASDAQ:ONEM). One that now seems congested, with Teladoc (NYSE:TDOC) still having difficulty reporting profitability.
Operating Income at Amazon
It is clear from a closer examination of Amazon’s operating income that the company is employing high volume, low margin strategies for its North American and International business divisions.
Highlighting its current single-digit margins, which had obviously declined over the previous three quarters, In FQ2, the business reported that the North America division had operating income of -$0.62B and margins of -0.8%, while the international segment had operating income and margins of -$1.77B and -6.5%, respectively.
With operating margins of 29 percent and operational incomes of $5.72B in FQ2’22, Amazon’s AWS sector, in comparison, has unquestionably done an exceptional job of holding up the crumbling fort. Due to this, the corporation generated an operating income of $3.31 billion in the second quarter of this year, which is still much below the $7.7 billion earned in the same period last year. No of how much it may hurt in the short term, the Amazon (NASDAQ:AMZN) management is committed to continuing along this route to the very end.
Following Quarters May See AMZN Post Losses
Given that it reported revenues of $121.23B and gross margins of 45.2 percent in FQ2, representing excellent YoY growth of 7.2 percent and 2 percentage points, respectively, Amazon (NASDAQ:AMZN) has done very well for itself despite the reopening cadence and global supply chain issues.
In contrast, Amazon continues to report net losses of $2.03 billion and net income margins of -1.7 percent in the second quarter of this year, respectively, marking a significant decrease of 79.3 percent and 8.6 percentage points year over year. It is crucial to remember that these were mostly caused by the investments it has made to date, which have lost a total of $13.93 billion over the past two quarters. If not, Amazon would have reported adj. net income of $3.36 billion in FQ2 of 22 and $4.71 billion in FQ1 of 22. Not as concerning, in fact.
A total of $51.41 billion in operating expenses were disclosed by AMZN during the second quarter of 22. It represented a growth of 11.6 percent quarter over quarter and 24.8 percent year over year.
Additionally, because operational expenses now make up 42.4 percent of sales and 93.8 percent of gross profits by FQ2’22, the ratio to its expanding revenues advanced more quickly than the former. From levels of 36.4 percent and 84.2 percent in FQ2’21 or 33.9 percent and 83.1 percent in FQ2’20, respectively, there has been a significant increase. Hence, comparing Amazon’s recent quarterly net income profitability to that of FY2021 or FY2020, we can see that it has been lower.
Ambitious Expansion Underway
It is clear that for its ambitious expansion to date, Amazon (NASDAQ:AMZN) has continued to rely in part on its long-term indebtedness. The corporation recorded long-term indebtedness of $64.85B and interest expenses of $0.58B by FQ2’22, showing enormous YoY growth of 28.9% and 31.8%, respectively.
Meanwhile, Amazon increased its net PPE assets to $232.14 billion and capital expenditures to $15.72 billion by FQ2’22, which represents a significant rise of 31.2 percent and 10 percent YoY, respectively. It is understandable why the business reported having too much capacity in FQ1’22 and FQ2’22.
But given that Amazon continued to build significant distribution centers in Southern California and Colorado and is currently constructing a $550 million warehouse in Niagara, it appears that it is definitely dedicated to this development strategy.
With a staggering rise of 229 percent from pre-pandemic levels, the company also plans to establish 250 new distribution stations and fulfillment facilities by the end of the year, on top of its existing warehouse area of 379M sq. feet in May 2022.
In light of this, it is easy to understand why Amazon’s Free Cash Flow (FCF) profitability has been affected for the previous few quarters and will remain affected in the near future.
Amazon reported FCF of -$6.76B and an FCF margin of -5.6% in FQ2’22, marking a significant fall of 430.5% and 4.2 percentage points YoY, respectively. If we were to consider the company’s performance during FQ2 of 2020, it showed a subsequent loss of 20.4 percentage points at that time.
What About Revenue Growth?
Amazon is anticipated to have revenue growth at a CAGR of 13.32 percent over the following six years, returning to solid profitability starting in FY2023 and achieving a net income CAGR of 44.68 through FY2027.
Additionally, it is anticipated that its net income margins will increase significantly, rising from 4.1 percent in FY2019 to 7.1 percent in FY2021, and ultimately to 10.7 percent by FY2027.
Amazon is expected to announce revenues of $522.61 billion and net earnings of $0.48 billion for FY2022, representing YoY growth of 11.2 percent and a decline of 98.5 percent, respectively.
Since the stock’s valuations and price actions are still trading at an apparent premium so far, it is clear that the market is highly understanding of this specific drop. Whether the current levels hold for the ensuing two quarters will be seen.
Featured Image: Megapixl @M-sur
