About four months ago I wrote about how Amazon (AMZN) was doing lip service about operating more efficiently coming out of a time of rapid expansion during the pandemic. I figured that the stock, trading at $102 at the time, would need to see words translated into actual financial results in order to sustain a big move higher. Well, here we sit with the shares up 40% to $142 each, aided by a blowout second quarter earnings report. The early signs are good, but it will take a string of quarters in a row to convince skeptics.
I say that because although Amazon’s operating margins are running at about 5% right now, that remains below the levels seen during the 2018-2020 period (5.2%-5.9%). To truly be convinced that Amazon has permanently moved into a higher margin business model, I think they need to reach record-high margins and prove they can keep them there (and hopefully grow over time).
There are signs anecdotally as well that the company is serious about running leaner. About two years ago the company launched “Amazon Day” delivery - a feature that allowed Prime members to combine multiple orders into a single delivery on a day of their choice each week. For shipments that didn’t require 1-2 day delivery, it gave the company more flexibility with delivery speed and cost, and helped customers manage their deliveries more easily (and maybe even reduce porch pirate activity on their property).
As a loyal Amazon customer and shareholder, I loved this idea - until I tried to use it. I would frequently place multiple orders in a given week and specifically ask them all to be delivered together the following Monday. They never did. Orders placed on Tuesday, Wednesday, and Thursday would all arrive early and packaged in separate boxes. From a customer satisfaction perspective, at least get the single package part right. If you want to spend more for them to arrive earlier than expected, fine, at least non-shareholders would probably be impressed. I was so annoyed that they offered this service and then refused to honor it whenever I opted in.
But a strange thing happened yesterday. I received 5 Amazon orders - placed Sunday, Monday, and Wednesday of last week - in 1 box, on the day I requested. I have never been so happy to get an item 8 days after ordering it in my life. Coupled with the company’s second quarter earnings report, it sure seems like we can comfortably say something is going on here. Hopefully management keeps the focus on efficiency because for the stock to keep rising materially from here, I think we need to see even higher profit margins in the coming quarters (the holiday season will be very telling on that front since big volumes should make it easier to dramatically impact the bottom line). While I am cautiously optimistic on that front, paring back the stock’s weighting after a huge run makes sense too.
Full Disclosure: At the time of writing the author was long shares of AMZN (current price $142) both personally and on behalf of portfolio management clients, but positions may change at any time.