Amazon's Profitable Q2: Is It Bigger Than Wal-Mart? - InformationWeek
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7/27/2015
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Amazon's Profitable Q2: Is It Bigger Than Wal-Mart?

Amazon's second-quarter earnings showed a small but unexpected profit. Some say the company is now worth more than the world's biggest brick-and-mortar retailer.

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Amazon turned in another surprising quarter Thursday, producing a "significant" Q2 profit (in MSNBC's words) of $92 million after a $57 million loss in the first quarter. The result was a 17% surge in Amazon's afterhours share price to $566, from a close of $482 Thursday.

Friday trading prices headed back toward earth, settling down at $529 at the close of trading, but still retaining a jump of $47.24 in value over the previous day's close. That means Amazon is worth as much as Wal-Mart, or probably a little more.

In simplistic terms, Amazon has a market capitalization of $247 billion, while Wal-Mart's is $232 billion. Skeptics would point out that Wal-Mart recently bought back $7 billion in shares while borrowing heavily, so more of its value lies in the hands of its creditors than Amazon's does. Nevertheless, Amazon has nosed ahead by the market cap measure at the moment, while Wal-Mart still leads in total revenue.

With its second-quarter report, Amazon also moves into the top 10 US companies by market cap, displacing J.P. Morgan Chase & Co., according to the Wall Street Journal's Moneybeat.

[Want to learn more about Amazon's first quarter? See AWS Revenue Reveals Cloud Powerhouse.]

It's a poignant moment for the Internet economy. The premier online retailer is beating the premier brick-and-mortar big-box store. Wal-Mart may continue to edge out Amazon with revenues derived from mainstream and heartland consumers. But Amazon is building a retailing giant of a different stripe, one more likely to offer same-day deliveries in Seattle, San Francisco, Miami, and New York than to consumers in Topeka and Des Moines. Amazon has built a network of automated distribution centers, and it's rapidly changing shopping habits among computer- and smartphone-equipped consumers, capturing their business with features based on search convenience and ability to deliver quickly and cheaply.

Still, Wal-Mart is beefing up its online presence. Its CEO, Fernando Madeira, jabbed at Amazon's July 15 Prime Day sale with the comment that Amazon's practice of charging Prime customers $99 to access its sale "just doesn't add up for us." It countered by offering reduced prices on 2,000 items, and Amazon sniped that Wal-Mart was charging less online than it did in its stores.

Amazon's Q2 $92 million in profit would be something less than a triumph for most companies with $23.2 billion in revenue. But in Amazon's case, CEO Jeff Bezos has emphasized investing for the long view for so long that any black ink appearing on the ledger is greeted with surprise and applause.

Accustomed to losses, Wall Street analysts had predicted another one, a loss of 13 cents per share. In the second quarter a year ago, Amazon lost 27 cents per share. This year, it made 19 cents per share. "Holy cow. What a quarter. They blew that thing out of the water," the Motley Fool's analyst Jason Moser told the New York Times.


(Image: Tuomas Kujansuu/iStockphoto)

(Image: Tuomas Kujansuu/iStockphoto)

It's as if CEO Jeff Bezos has finally decided that Amazon's overall credibility as a business will be on a firmer footing if he slightly slows Amazon's pell-mell investment for expansion in favor of a display of profits. It's a minor course correction but one with big results, as the stock surge illustrates.

If Amazon remains a low-margin business, is it wise for investors to bank so much on future profits, if that's really what the stock surge means? "I have no idea. It's not rational," pointed out Forrester Research analyst Sucharita Mulpuru-Kodali in response to an InformationWeek email query.

So, what to make of headlines such as the Wall Street Journal's "Amazon Now Worth More Then Wal-Mart" or ABC News' "Amazon's Rise and How It Became Bigger Than Wal-Mart"?

Mulpuru-Kodali responded: "At this moment in time, I would say no. Valuation should be based on the net present value of a company's earnings, right? Amazon's earnings are about zero and will be into the foreseeable future. The net present value of zero is zero."

"But there are people that believe that Amazon is very innovative and will transform the world over time. Apple is worth more than Walmart and no one questions that. And there are people who think that Amazon is as good as Apple," she continued.

Indeed, part of the renewed faith in Amazon may have less to do with its retail innovations and more to do with the growing strength of its Amazon Web Services cloud unit. CFO Brian Olsavsky (replacing Tom Szkutak) during Thursday's earnings call, said AWS revenues grew at a pace of 81% over last year's Q2, yielding $1.82 billion. That's up from 49% growth in the second quarter.

Overall, Amazon's $23.2 billion in first-quarter revenues were $800 million more than forecast and would have been stronger but for the strength of the dollar versus other currencies. Second-quarter revenues

(Story continues on page 2)

Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive ... View Full Bio

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GAProgrammer
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GAProgrammer,
User Rank: Ninja
7/31/2015 | 3:40:12 PM
Market capitalization
Definition:  the total dollar market value of the shares outstanding of a publicly traded company; it is equal to the share price times the number of shares outstanding.

Aka - all it takes is a downward stock value for this to change for Amazon. Every company that is measured this way is one bad PR event (like the Prime Day debacle) away from devaluation. Don't read too much into these tech articles that "X is bigger than Y because of market cap." They make good headlines, but horrible investing advice. Retail dollars and profitability are where the rubber meets the road and where WalMart slaughters Amazon.

As for investors tolerating zero profitability - Bezos & Co already had to back away from statements about not caring about profitability, precisely because of investors. Be careful when reading articles like this that the author hasn't cherry-picked comments just to make a point.
Angelfuego
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Angelfuego,
User Rank: Ninja
7/27/2015 | 8:37:31 PM
Re: Amazon
This doesn't surprise me. I assumed Amazon surpasssed Walmart a few years ago. I love Amazon and shop on their website regularly. I also think Amazon gift cards are a great gift!
Angelfuego
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Angelfuego,
User Rank: Ninja
7/27/2015 | 8:37:31 PM
Re: Amazon
This doesn't surprise me. I assumed Amazon surpasssed Walmart a few years ago. I love Amazon and shop on their website regularly. I also think Amazon gift cards are a great gift!
CharlesB554
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CharlesB554,
User Rank: Apprentice
7/27/2015 | 1:18:43 PM
Amazon
Malpuru-Kodali is saying Bezos wants to build a giant, dominant company of the future, not a highly profitable one. I think he's doing that. At some point, when a second generation of management comes in, they'll be able to figure out how to make it profitable, given the foundation that Bezos & Co. have built. "Amazon's earnings are about zero and will be into the foreseeable future," she says. Yes, and it sales keep growing and even its infrastructure, the AWS cloud, is proving to be profitable. I think Amazon wastes a lot of money trying to become a major player in tablets and cell phones. But that's the price of this expansionist outlook. And many investors have decided they want a piece of a dominant company of the future, profits or no profits.
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