The indirect effects of COVID-19 are accelerating growth for Amazon. The company reported Q2 results well ahead of Wall Street expectations driven by two key drivers:
- Consumers are shopping online more. North America retail revenue grew 44% y/y in Q2, an acceleration from 29% y/y growth in Q1. Our changing shopping habits drove impressive volume for Amazon’s retail business. New and existing customers used Amazon as a critical resource in Q2.
- Demand for cloud services is up. The shift to distance learning, an increase in gaming, and more video-based communication all contributed to more demand for AWS. As a result, segment revenue was $10.8B in Q2, up 29% y/y, driving record profitability for the company. Note that Amazon’s AWS segment contributes more operating income ($3.36B in Q2) than the NA Retail segment ($2.14B in Q2). Growth in AWS generally accelerates growth in profitability.
Ecommerce just saw a two-year time warp
US ecommerce penetration went from 16% of retail spending in the first quarter of 2020 to 40% in the month of May. Yes, ecommerce growth accelerated, but note that physical retail was also shut down in May, so both sides of that ratio moved in favor of ecommerce. We expect US ecommerce to grow ~30% in 2020 and, based on eMarketer data, we expect physical retail to shrink by 14% in 2020. We expect ecommerce to settle well ahead of where it was, 20% to 25% of all retail, as car dealerships, gas stations, etc. come back. That represents a two-year time warp for ecommerce, pulling forward what had previously been a slow and steady, undeniable trend.
Amazon’s guidance suggests COVID-related trends will continue
Amazon’s bullish Q3 revenue guidance of $83B to $97B was above consensus of $86.1B at the midpoint. Guidance suggests that the company expects recent tailwinds will persist. Guidance for Q3 operating income of $2B to $5B was ahead of consensus ($3.1B), despite the company’s reluctance to show profitability.
The way that we shop, work, and play is changing quickly. Amazon is a clear beneficiary of many of the changes brought on by COVID-19.