The online e-commerce behemoth Amazon (AMZN) reported sluggish Q2 results after the market closed on Thursday. The company is investing heavily in new distribution warehouses and gadgets to expand and improve its service offerings that continued to weigh on the bottom line despite revenue growth. Additionally, weaker-than-expected growth in cloud-computing business, one of its most promising businesses, took a toll on profitability.
Amazon Results in Detail
Amazon reported a huge loss of 27 cents per share, much wider than the Zacks Consensus Estimate loss of 13 cents and down from year-ago earnings of 2 cents per share. Revenues climbed 23% year over year to $19.34 billion, surpassing the Zacks Consensus Estimate of $19.325 billion.
The year 2014 has so far been eventful for Amazon as it rolled out a number of new products including a hand-held grocery-ordering device, TV streaming box, unlimited e-book subscription service, a music-streaming service and the new Fire smartphone. The company will continue to invest in new business offerings in the coming months to boost its competitive advantage over major tech rivals such as Apple (AAPL), Google (GOOG) and Netflix (NFLX) (read: 2 ETFs to Ride on Netflix Q2 Strength).
For the current quarter, the company projects 15–26% revenue growth to $19.7 billion to $21.5 billion, much higher than our current estimate of $19.330 billion. It also expects an operating loss between $410 million and $810 million in the third quarter compared with loss of $25 million in the same period last year.
Following the disappointing earnings, shares of AMZN tumbled as much as 11.5% in aftermarket hours. The earnings miss was not solely responsible for pushing the shares down, the possibility of another big loss in the third quarter compelled investors to flee from the stock. Investors have turned increasingly cautious about betting on the company’s long-term growth potential at the expense of little to no profit.
Moreover, Amazon has a Zacks Rank #5 (Strong Sell) and a poor industry Rank (in the bottom 18%) at the time of writing as per the Zacks Industry Rank, suggesting that more pain could be in store for it in the near term (see: all the Technology ETFs here).
ETFs to Watch
Given the sluggish after-market trading in the stock and weak short-term growth outlook, investors may want to take a closer look at some ETFs having higher allocation to this Internet giant. For those, we have highlighted three funds that would be in focus in the coming days.
Market Vectors Retail ETF ((RTH - ETF report) )
This fund provides exposure to the 26 largest retail firms by tracking the Market Vectors U.S. Listed Retail 25 Index. Of these, AMZN takes the second spot at 9.48%. The ETF has a certain tilt toward specialty retail, which accounts for 29% share while hypermarkets (16%), department stores (12%) and drug stores (12%) round off to the next three spots.
The product has amassed $58.6 million in its asset base and charges 35 bps in annual fees. Volume is light as it exchanges nearly 31,000 shares per day. RTH is down 0.3% in the year-to-date time frame and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a Medium risk outlook (read: Can Carl Icahn Revitalize Retail ETFs?).
First Trust Dow Jones Internet Index ((FDN - ETF report) )
This is one of the most popular and liquid ETFs in the broad tech space with AUM of over $1.7 billion and average daily volume of more than 576,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year.
In total, the fund holds 42 stocks in its basket with Amazon taking the top spot with a 9.05% share. From a sector look, Internet mobile applications account for more than half of the portfolio while Internet retail makes up for 26%. The ETF added just 0.55% year-to-date and has a Zacks Rank of 3 or ‘Hold’ rating with a Medium risk outlook.
PowerShares Nasdaq Internet Portfolio ((PNQI - ETF report) )
This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 99 stocks in its basket with AUM of $322.6 million while charging 60 bps in fees per year. It trades in moderate volumes of around 72,000 shares a day (read: China Internet ETF: The Best Choice in the Space?).
Amazon occupies the top position with an 8.62% allocation. In terms of industrial exposure, Internet software and services makes up for more than two-thirds of the share in the basket, followed by Internet retail (30.35%). PNQI is up 1.2% so far this year and currently has a Zacks Rank of 3 with a Medium risk outlook.
Investors should note that these products might not perform as badly as the stock. This is because these ETFs provide diversified exposure to various segments and securities, suggesting that the space can easily counter shocks from some of the industry’s biggest components.
As such, investors shouldn’t completely write off the above-mentioned ETFs from their holdings based on AMZN’s weak earnings and sluggish short-term outlook.
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