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Amazon makes money everywhere

10082020_Amazon

Amazon makes money everywhere

When Amazon reported its most recent quarterly financial results, management said the recent surge in online retailing that came as the COVID-19 pandemic kept shoppers at home, offered a glimpse into the future of the company’s business outside the US. Long-term investors should like what they see.

Amazon International Segment – Operating Income (US$m)

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For the first time in more than half a decade, and after significant investment, Amazon’s International segment recorded positive quarterly operating profit. Management described an array of Amazon Prime membership benefits that were offered internationally earlier in the lifecycle of the program than had been the case in the US. This meant adoption of the Prime program was well-established to meet the pick-up in demand that happened in the past few months.

As higher volumes came on to Amazon’s platform, this generated greater revenues that came with little extra cost. Amazon leveraged its fixed costs “to the hilt”, in the words of the Chief Financial Officer Brian Olsavsky, all in one quarter and demonstrated a level of profitability earlier than many had expected. Profit before interest and taxes outside the US reached $345 million, and contributed to aggregate profits of $5.8 billion in the quarter.

We expect management to redeploy some of these earlier-than-expected gains back into the business, building out additional fulfilment and logistics capacity, and continuing to hire staff to support the growth. In the near-term profit margins may come back down, or even drop below zero. But we have had a look into the future of Amazon International’s profitability already.

Amazon is a business that will continue to win in very large markets around the world, and will be a compounder for years and decades to come.

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Christopher is a Portfolio Manager for the Montaka funds and the Montgomery Global funds. He joined MGIM at establishment in 2015.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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