This Retailer Is Heading the Right Way

Waqar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon (NASDAQ: AMZN), the online retail giant, released its earnings for the second quarter on July 25, 2013. As a result some heavy investments, the company missed its earnings’ estimates by $0.07.

With Amazon failing to report any profit, the big question is: What’s in store for the company in the future?

Quarterly earnings

Amazon posted a second-quarter loss of $7 million, or $0.02 per share, versus a profit of $7 million, or $0.01 per share, last year. Company’s revenue stood at $15.7 billion, up 22% from the last year. Analysts at Thomson Reuters expected the company to make a profit of $0.05 per share on $15.73 billion revenue.

Sales in North America rose 30%, while international revenue increased by 13%. In the international market, more than 13% of revenue came from Japan. Amazon Web Services’ revenue rose 61% to $892 million, reflecting the huge success in the cloud business.

In North America, Amazon’s operating profit grew 19% to $409 million. Amazon’s international segment wasn’t able to earn any profit, however. On the whole, the company’s gross margin grew 2.5%, whereas operating expenses were up 23% from the same quarter last year.

Profit guidance

In the next quarter, Amazon expects to generate revenue of $15.45 billion to $17.15 billion. Its earnings’ forecast ranges from a loss of $100 million to a profit of $275 million. Analysts expect Amazon to earn $0.09 per share on revenue of $16.98 billion. For the full year, analysts’ estimates stand at $1.27 a share on $74.75 billion revenue.

Going forward

In order to expand its video content, Amazon has gone into an extended deal with Viacom. Through its partnership with Viacom, Amazon has been broadcasting shows like "SpongeBob SquarePants" on the Internet. In order to increase its viewership, the company plans to uploading some new comedy series during the next few months as well.

In the international market, Amazon still needs more time before it starts to capture significant market share in digital media such as e-books and MP3s. As a result, the company will continue to invest in the development and marketing of its gadgets, requiring even more capital. As part of this plan, Amazon is making huge investments in its fulfillment centers in Spain and China. In the third quarter, the company will spending a lot on its digital video content in the U.S. and Europe. This spending is the primary reason behind a conservative third-quarter forecast.

As Amazon invested millions of dollars on its expansion plans, its earnings took a major hit during the second quarter. With the company currently focusing on grabbing market share, operating losses aren’t a big worry. Its top priority is to boost its revenues through low-priced products throughout the globe. Thus far, Amazon has been extremely successful with its long-term plan. A 22% rise in its revenue is a testimony to this success.

Competitors

Amazon’s biggest competitor, eBay (NASDAQ: EBAY), released its second-quarter results during the third week of July. The company reported a profit of $0.49 a share, down $0.04 from the same quarter last year. Its revenue jumped by 4%, however. eBay’s marketplace posted an increase of 10% in revenue, while its payment segment’s revenue grew by 20%. The main reason behind low profit was a 12% increase in the company’s operating expenses.

eBay is trading at a forward price-to-earnings ratio of 16.14, making it one of the cheapest buys in the retail industry. According to the sell side, eBay has a mean target price of $63 which shows that it’s undervalued by more than 20%. Its low price makes it one of the best buys in the retail sector.

Another competitor, the American warehouse club Costco (NASDAQ: COST), reported an increase of 8% in its June sales. Changes in oil prices had a positive impact on Costco’s same-store sales, while currency fluctuations negatively impacted the company. In 2013 and onwards, Costco has plans to expand across the globe, particularly in the Asian-Pacific region.

Though Costco is doing well, its current stock price doesn’t make it a lucrative investment. Costco is trading at a high forward price-to-earnings ratio of 23.26, making it one of the most expensive buys in the retail sector. According to the sell side, it has a mean target price of $114 which makes it slightly overvalued. I don’t recommend buying Costco at this stage.

Conclusion

As Amazon’s long-term strategy is to sell digital content through its gadgets, it wants to sell as many Kindle devices as possible -- even at a loss. Selling more digital content in the future will generate healthy margins for the company and turn its losses into profits. It has been extremely successful in implementing this plan in the U.S. but still needs time to expand in Asia. In Europe, the Kindle looks strong but sluggish economic conditions have slowed its growth. In the long term, however, Amazon shouldn’t worry about the European market. Further, Amazon Web Services’ tremendous growth reflects that the company is on track to achieve its long-term goals.

The amazing thing about Amazon is the investors who just keep on having faith in it. A high forward price-to-earnings ratio of 98 shows that investors expect Amazon to generate substantial profits in the future. They seem to be thinking in the right way, as it is all set to achieve substantial incomes in the future. In short, buy Amazon before it’s too late.

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Waqar Saif has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, and eBay. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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