The e-commerce and cloud services powerhouse that is Amazon (AMZN -8.43%) proved itself yet again in the third quarter -- but primarily on the top line. It sold an impressive $70 billion worth of stuff, and revenue grew 24%. But when Wall Street saw the numbers late last Thursday, all that the market focused on was that profits and margins were lower than expected, and share prices tumbled after hours. In this segment of the Oct. 25 Motley Fool Money podcast, host Chris Hill and analysts Jason Moser, Emily Flippen, and Ron Gross break down what's really going on at Amazon, the power of the Fire brand, why the stock rebounded so fast, and more.
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This video was recorded on Oct. 25, 2019.
Chris Hill: Earnings season in full swing. We're going to begin with Amazon. The e-commerce giant sold $70 billion worth of stuff, Jason, in the third quarter. But profits were lower than expected due to all the investments that Amazon's been making. Interesting to see, you look at the stock after hours, it was down nearly 10%. When the trading day opened, it basically stabilized.
Jason Moser: Having gone through the report and the call, I appreciate that the market has come to its senses. Maybe it's not an ugly quarter, if you mean to do it --
Ron Gross: [laughs] I'm going to write that down and use that one.
Moser: [laughs] Come on! Listen, you said it, revenue grew 24% for the quarter. $70 billion in sales. This is a behemoth. We know what they're capable of. Given the market opportunity, I don't understand how you can justify not owning this stock. I do understand the knee jerk reaction from the market when you look at the profitability picture. To compare margins from 2018 to 2019, and I keep track of these operating margins, operating margins in the North American segment fell from 5.9% to 3%. Operating margins internationally improved slightly. But Amazon Web Services were down from 31.1% to 25.1%. So, while they're bringing more on the revenue side, they're spending more on the investment side. That makes a lot of sense. They made this move to one-day shipping, they said it's resulting in more orders and more spending. We like to see that. We're seeing another lever coming to light here in the advertising. In line with that advertising, I was really impressed to see that the Fire TV franchise here, all of these devices that support this Fire TV platform, they've got more than 37 million active users worldwide. It's the No. 1 selling streaming media player family in the U.S., U.K., Germany, Japan and India. I had to double check this with Emily because it sounded like -- I don't use Roku, I have Amazon, but I know that there are a lot of people out there that use Roku. It's something to the tune of about 30 million active accounts. But it really speaks to the strength in Amazon's media platform. As we know, when you have all of those different levers, you can survive even the toughest of times.
Emily Flippen: Does anyone else feel like Amazon maybe played themselves a little bit with the two-day shipping thing and then one-day shipping, and now it's like, everybody is shipping for free in two days. Amazon's like, "Ugh, now we have to up the ante again!" I'm not surprised to see this come out of Amazon. Still a great company, like Jason mentioned, they have so many different businesses that are all extremely popular. But I think it's hilarious to see them spending so much money on shipping when we see big competitors, like Shopify, coming out and offering free two-day shipping to their customers. Obviously not retail customers, their customers are businesses. But fact being that, hey, this is something that we now expect. As consumers, we expect to get our products really quickly, and man, is that expensive!
Gross: No one ever talks about Amazon valuation. Is there ever going to be a price, ever, in the history of the human race, where someone's like, "Amazon's a little pricey, I think I'll pass right here"?
Moser: It's a fair point. We've been having that discussion ever since it was $100 a share. It is one of those unique companies. We could say the same thing about Netflix to an extent. I think that's where there are certain businesses where the future transcends any present-day valuation --
Gross: If you use the word optionality, I'm walking right out of here.
Moser: I didn't say it!
Hill: But if you go back to last week's show, when we talked about retail, and some of the concerns going into the holiday season, a quarter like this from Amazon, where they're warning a little bit on their holiday quarter, which is so important, that has a ripple effect throughout the industry.
Moser: There's no question. But by the same token, we say this quarter in and quarter out, this is really seeing the forest for the trees. Like Emily was saying, they set the standard. Now they're having to set a new standard that costs a lot of money. I would imagine in five to 10 years, we'll be having this discussion again. But investors seem to be winning all along the way.
Gross: One more quick question. Are drones still a thing here? Are they serious about it?
Moser: Yeah. They're getting ready to launch.
Flippen: We had a member event not too long ago, and for a reckless prediction for what's going to happen in six months, I said, "We're going to start seeing drone deliveries get rolled out." And there was an audible [groan]. [laughs]
Gross: That's a bold prediction.
Flippen: It was admittedly a bold prediction. But we see a lot of companies making headways into it. I think the question is not a matter of if, it's a matter of when. Maybe six months is being aggressive. But look, Amazon's been trying to do this for a long time now. I really do think Amazon's going to be the first ones to roll out with a nationwide drone delivery.