Amazon’s Revenue Was Strong, Earnings and AWS Missed

Amazon (AMZN) announced its second-quarter 2019 earnings after the closing bell on Thursday. The stock fell over 2.4% in the extended session of trading on Thursday, as it missed earnings estimates and had a mixed bag of a quarter.

Amazon’s revenue came in at $63.4 billion for the second quarter, up 19.9% year-over-year. The company beat Wall Street’s estimates of $62.5 billion. Plus, Amazon’s revenue growth accelerated after four consecutive quarters of slowdown.

Amazon’s earnings missed expectations despite lower forecasts

Meanwhile, as expected, the company’s bottom line took a hit during the second quarter. Amazon posted a subdued net income of $2.62 billion, compared to nearly $3.5 billion in the first quarter.

The company said on the first-quarter earnings call that it will be investing $800 million on making free, one-day shipping a standard for US Prime members. Amazon’s shipping costs soared 36% year-over-year in the second quarter to $8.1 billion.

Higher shipping costs were one factor that caused the company to miss EPS estimates. Amazon made $5.22 per share—way lower than the $5.57 per share analysts were expecting.

Amazon’s Revenue Was Strong, Earnings and AWS Missed

AWS revenue missed expectations and operating margins narrowed

Amazon Web Services, which has been the key driver of the company’s growth, slowed down in the first quarter. AWS generated $8.38 billion in revenue for the company, up 37.4% year-over-year, after the segment grew consistently over 40% year-over-year for several quarters. Analysts were expecting AWS to generate $8.48 billion—another factor that caused the stock to fall.

Also, Amazon’s operating margin fell from 26.9% in the same quarter last year, and 28.9% in the first quarter, to 25.3%. That being said, AWS remains a key contributor to the company’s bottom line.

Amazon continues to see strong growth in subscription services like Prime

Meanwhile, the company’s revenue from subscription services—like Prime membership—continues to grow quickly. Continued growth in the segment shows that Amazon’s move to increase US Prime membership rates to $119 annually last year may have worked out.

Amazon made $4.67 billion from subscription services, which mainly consist of revenue from Prime membership. Revenue from subscription services grew 37.2% year-over-year in the second quarter, compared to growth of 39.9% year-over-year.

Amazon’s digital ad revenue growth slowed down in Q2

Amazon’s ad business showed more signs of slowing down. The company generated $3.0 billion from its “Other” segment, which mostly includes its burgeoning digital ad business. The segment grew only 36.8% year-over-year in the second quarter of 2019, compared to a growth of 97% year-over-year during the fourth quarter of 2018.

In the previous quarter, the company expanded its Whole Food’s delivery footprint to more markets at home.

Amazon expects to generate between $66.0 billion and $70.0 billion in revenue in the current quarter, which would represent growth between 17% and 24% year-over-year.

The company expects its bottom line to remain subdued as it continues to make huge investments in its own business, including taking on its own shipping resources. It expects an operating income in the range of $2.1 billion–$3.1 billion in the current quarter, compared to $3.7 billion in the corresponding quarter last year.