Amazon expectations were 'too high' as shopping habits normalize: Analyst

Amazon posted its third $100 billion quarter in a row. Loop Capital Managing Director Anthony Chukumba joins Yahoo Finance Live to discuss.

Video Transcript

- But let's turn our attention back to Amazon. We've got Anthony Chukumba, Loop Capital Managing Director. Anthony, we were just walking through the numbers in the corner. And I have to wonder if this is-- the stock move today, is that just the case of investors really having these sky-high expectations, given the exceptional year that happened? Or are there some warning signs flashing ahead?

ANTHONY CHUKUMBA: I think that it's much more the former than it is the latter. I think that expectations were simply too high. And it's not just investor expectations. Quite frankly, I think internal expectations were too high. You have to remember that this is the first quarter that they were anniversary for the pandemic, and the acceleration that it saw from the pandemic.

And now things are normalized, Norah. You have more and more people have been vaccinated. They're starting to go back to their normal shopping habits. And I just think it was very difficult for them to forecast what the impacts of that would be on their business. So I don't think that this is necessarily a warning sign for Amazon, but it does reset expectations down to a much more manageable level. Because you are going to have these very difficult year-over-year comparisons for the next few quarters.

- Yeah the comps-- the comps are tough, as we know. Kind of enjoying in that shift in the way people purchase things in the pandemic. But when you look at cost, that was the one thing I was-- you know, Keith and I were just talking about it. When you look at that, how worrisome is that weighing on what the company can benefit from moving forward? Even if there is some stickiness in the way people shop, it seems like the costs of running the business, and the warehouse staff-- labor, also, a big question mark there-- how might that weigh on the quarters ahead?

ANTHONY CHUKUMBA: When it comes to costs, and Amazon, I worry a lot less about those, because a lot of that is investments that they're making ahead of future growth-- whether that's investments in final-mile delivery, whether that's investments in AWS-- and Amazon's track record of getting a return on their investments is quite good. So it's not something I'm necessarily worried about. Look, wage pressure it's definitely a thing. But I think that they'll be able to at least partially offset that by higher revenues. Because wages are going up, and prices of products are probably going to be going up as well.

- So what do you think are the realistic expectations for Amazon moving forward? I mean, the reality is we have continued to see big growth for online-store sales for the company. But we did hear from the CFO yesterday, who said, look, people aren't just spending as much time online. I mean, when you talk about resetting expectations, is this more in line with what we're likely to see for Amazon moving forward? Regardless of how they shift things around with Prime Day, regardless of some tweaking in terms of drumming up more interest within the platform.

ANTHONY CHUKUMBA: So prior to the pandemic, Amazon was growing their top line in the 20-plus percent range. I think we're going to get back to more of those type of numbers. Maybe even a little bit less than that, because the other issue with Amazon is just the law of large numbers, right? I mean, we just saw a third consecutive quarter in which they did well over $100 billion in sales. It's just hard to continue to grow at the rates that we enjoyed in the past, when you become that large.

But one thing to consider, and one thing I was just sort of calculating-- so Amazon, the earnings that they generated last quarter-- so in the second quarter-- was two thirds of the earnings they generated for all of 2019. I mean, that's just a staggering number when you think about it.

So yeah, is growth slowing? Absolutely. Should we expect that to continue? Absolutely. But let's not forget that this is a company that's just generating a ton of net income, and continues to be a bigger and bigger player in our everyday lives.

- Yeah, I suppose there would be alternatives for investors out there looking to invest in tech here. And as you noted in your reaction to what we saw on the earnings call there, bears might point to a drop in margin-- particularly in the cloud business, though the cloud numbers from the quarter were stronger than expected. I mean, does that maybe point to the increasing pressure as Google and the like start to catch up on the cloud side? You know, Microsoft's been pushing ahead on that front. I mean, is that maybe an area that there is some truth to increased pressure actually resulting on the company's financials this time around?

ANTHONY CHUKUMBA: That's a great question. I mean, the cloud business was actually one of the bright spots in the quarter. Growth was 37% year over year, so that actually accelerated from the growth that we saw in the first quarter. In terms of the profitability-- first off, remember we were anneversing a really tough comparison. It's just tough to continue to do 31% operating margins.

And I think that the declining profitability-- a lot of it's just a function of mix. As Amazon goes after more and more large-enterprise cloud business, that's just less-profitable business relative to getting another startup to host their servers on NWS. So it's not necessarily something that I'm concerned about.

The other thing to think about, in terms of cloud-- it's not necessarily a zero-sum game. I mean, the total addressable market is massive, and it's only getting larger as more and more companies of all sizes realize the benefits of cloud versus on premise.

- And Anthony, finally-- we're talking about Amazon today, but we've turned to you a lot over the last six months to talk about the mean trade. Obviously, somebody who used to cover GameStop. I'm just curious what you make of Robinhood's debut. You know, we saw a decline 8% yesterday. Is this just a symptom of the structure of the IPO? What's your sense on why we saw a less than stellar debut?

ANTHONY CHUKUMBA: Yeah, that's a great question. Look, I think it's a combination of a few different factors. I mean, one is that there are some real questions around the long-term sustainability of their business model, quite frankly. There's questions about pay for order flow. There's questions about crypto. And obviously, they're trading a lot of crypto. But who knows what's going to happen with that, if crypto remains under pressure.

And then, it almost seems like with some individual investors there was almost like a backlash. It was almost like their chance to get revenge on Robinhood for what happened in January, when they had to restrict trading in mean stocks. Now what these individual investors don't understand-- well, quite frankly, there's a lot of things they don't understand-- but that was not Robinhood's decision. I mean, it was based off of the companies that were clearing their trades. And they just didn't have the collateral. And they raised a bunch of money, in a very short period of time, to alleviate that.

But a lot of these individual investors don't see that. And they're actually shorting Robinhood stock. So it'll be interesting to see how this plays out, going forward.

- OK, we'll be watching. Anthony, it's always good to have you on. Anthony Chukumba, Loop Capital Managing Director.

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