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Amazon 2Q - Revenue up, profit down

Amazon is an equally exciting and amazing business, every little bit as intriguing as the new technology titans of our time. What Jeff Bezos has been able to build over a period of two and bit decades is a testament to his vision and belief that anything is possible. In fact, the anything store from A-Z is what Bezos wants Amazon to be. Whether you are a part time user of the service to buy infrequently, or whether you are a Prime user who likes to order everything at all points online, and live for the convenience, then you pay more and Amazon is happy to deliver. I guess Bezos and Amazon work with the philosophy that if the customer adopts the product/service, then we will give it everything, if not, cut it and can it.

The company reported last evening, Second Quarter Sales up 25% to $38.0 Billion, missing earnings per share consensus by a wide margin (this is not new for this business), beating revenue expectations equally by quite some margin. It is equally true that it is not your average business to try and value, which is why, like many growing businesses, there is too much to try and "work out". It is just too tough with the likes of Amazon to value this relative to a peer, in reality they are a disruptor of what we found to be normal. Shopping online is no longer something new.

The company also has a massive web services business (AWS - Amazon Web Services), where you can host your infrastructure offsite, at both a convenience and cost benefit. Gone are the days of knowing where your "box" or server was. The company continues to invest heavily there, looking to open five new sites in France, Sweden, Hong Kong, China and another (a second government cloud region in the East) "shortly". Investments like these suck a lot of capital, as does their plans to add large amounts of space to their floor space in their fulfilment centre (where your goods come from). Equally, with Amazon becoming more aggressive in the content space, that investment sucks a lot of capital too.

This is still very much a North American business. 22.3 billion of the 37.955 billion Dollars generated in revenues coms from that region, the home market. There is scope to grow their business a lot in many ways, through content, through Amazon Fresh (and Prime Go), through continued roll out of their existing services in many destinations. India has become an interesting market for Amazon too, I am sure that they are finding it VERY different to their home base. Guidance was a little mixed, relative to expectations, not by too much.

The long and short of these results is that the company is investing in the key areas we have spoken about (the most in any other previous quarter in their history), as well as on engineers to build out their AI Alexa service. There is the small matter of the Whole Foods deal closing and seeing how the two models are going to combine, on the earnings call, Brian Olsavsky (CFO at Amazon) had this to say about the organic food store: "We think they are very customer-centric, just like us. They've built a great business, focus around quality and customer. So we're really glad to join up with them." It is that simple.

There are many, many lines in the water here at Amazon. If you are competing against them, then you had better beat them on price. The demise of the department store model has in some senses been as a result of more competition from niche brands (who like Nike, now have their own store on Amazon) and the changing perceptions about shopping online. Did you know that briefly yesterday, Jeff Bezos was the richest guy in the world on paper? And that was after having sold a lot of shares recently to fund his spaceship program. For Bezos, it isn't about meeting the numbers that the analyst community sets for the company, in fact he has never been on a single earnings call to explain his vision, that was set out in the founding statement and letter.

In my opinion, Bezos writes just as compelling letters as Buffett, or Gates, or any of the other business giants. He talks about, in the recent annual report of True Customer Obsession and one must Embrace External Trends, as well as High-Velocity Decision Making. He then always attaches a 1997 letter to shareholders, now 20 years in and just as relevant. Some interesting points to pull out from there: "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions." That is exactly where we are now, and if you can't take the heat of heavy investing, then this business is not for you. If you are looking for visionary thinking, a future-is-now business and something that will continue to define our lives. We remain conviction buy on Amazon.


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