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Amazon profit soars, but analyst warns against complacency

While Amazon’s third-quarter results showed another spectacular period of growth, analysts are warning that the company is far from invincible, facing a growing threat from retailers who are revamping their omnichannel offer to better serve customers. 

Amazon has reported a 37-per-cent increase in net sales to US$96.1 billion in the third quarter, while operating income increased to $6.2 billion, pretty much double that of the same period last year. 

“We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season,” said CEO Jeff Bezos. 

But while the top line figures were impressive, Neil Saunders, MD at GlobalData, warns that the company’s boost during the earlier part of this year was an exception caused by Covid-19 lockdowns, pointing out that product-sales growth of 32.8 per cent for the quarter was much slower than the 40.1-per-cent rate posted in the second quarter. 

“As the retail economy opened back up and other retailers ramped up their omnichannel services such as curbside collection, Amazon’s share of wallet dropped back a little.

“Given that Amazon pulled in almost $53 billion in product sales during the quarter, such a point may seem rather inconsequential. Nevertheless, it is important as it busts two common myths. One is that online sales penetrations seen at the peak of lockdown represent a new normal. The other is that Amazon holds a monopoly position in retail and that it cannot be easily challenged by other retailers,” he explains. 

“The untruth of the latter point is also revealed when contrasting Amazon’s results to those of rivals, many of which had far higher online sales growth.

“Competition is intensifying for Amazon.”

Solid bottom line

Saunders was impressed by Amazon’s 197-per-cent uplift in net income. “It shows the efficiency of an operation which has many profit centres, all of which are firing. It also means that Amazon is in a very strong position to expand parts of its operation like logistics and delivery which will further enhance its ability to service its customers and its third-party sellers.”

EMarketer analyst Andrew Lipsman described the internet behemoth’s third quarter as surpassing every expectation on both the top and bottom lines, particularly given the company pushed Prime Day into the fourth quarter this year. 

“While it was clear that the pandemic-driven shift to e-commerce would keep Amazon’s topline elevated, it surprised by easily surpassing an already high bar. More importantly, profits soared on strong growth in third-party seller services and a big acceleration in Amazon’s high-margin ad business as the digital-ad market recovered.”

Analysts appear to agree that Amazon’s fourth-quarter results will also spike, given the shift of Prime Day to October. 

Saunders believes the prospect of further lockdowns will be beneficial, albeit temporarily, to Amazon – especially if they coincide with the holiday season. 

“Longer term, initiatives around luxury fashion and new grocery concepts will also provide an uplift, although Amazon will need to think about how to optimise these areas as they don’t neatly fit into its traditional way of operating.”

Amazon has tipped net sales of between $112 billion and $121 billion for the final quarter, representing growth of between 28 and 38 per cent year on year, but that includes a projected benefit from foreign exchange rates. 

But the company’s projection of operating income is extraordinarily vague at “between $1 billion and $4.5 billion” compared with $3.9 billion in the fourth quarter of last year. That estimate assumes about $4 billion of costs related to Covid-19.

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