Motley Fool: A river of revenue

Long before COVID-19, millions already relied on Amazon.com (Nasdaq: AMZN) to deliver things they needed. As of January, the company reported 150 million Prime members – who not only pay a subscription fee but also shop on Amazon more than non-Prime members do.

The surge in orders resulting from COVID-19 boosted net revenue by 40% to $89 billion in the company’s second quarter, demonstrating that Amazon can still grow briskly despite its massive size. Earnings doubled year over year to $5.2 billion. Fueling that earnings growth was the Amazon Web Services business, known as AWS. Even though AWS accounted for just 12% of Amazon’s revenue in its most recent quarter, it made up 58% of operating income. The good news for investors is that this unit is thriving, with revenue increasing 29% year over year.

In its most recent quarter, Amazon more than doubled grocery delivery capacity and tripled grocery pickup locations. Millions of people will be trying Amazon’s services for the first time, and some will stick around and remain customers for the long term.

Costs remain high, but while the pandemic is causing surges in revenue and expenses, the former is likely to last longer than the latter. When COVID-19 has run its course, Amazon will have attracted more customers and will have fewer pandemic-related costs. (The Motley Fool owns shares of Amazon.com and has recommended its stock and options on it.)

Ask the Fool

Q. Can you explain what a “burn rate” is? – H.D., Madison, Mississippi

A. A company’s burn rate reflects how rapidly it’s burning through cash. It’s generally not a concern with big, established businesses, but startup companies rely heavily on cash to survive. So it’s worth looking into the burn rate of any smaller, fast-growing companies you’re interested in – and any company that’s struggling.

New and growing companies are often unprofitable in their early years, but losing too much too fast can be fatal. Imagine that Big Bangs Salon (ticker: BZNGA) reported negative $100 million in free cash flow in its latest quarterly report, with its cash balance falling from $300 million to $200 million. With a burn rate of $100 million per quarter, it’s likely to run out of cash in a few quarters. It will need to generate more cash – perhaps by serving more customers, issuing more stock or taking on debt – and/or cuttin spending, which could slow its growth.

Q. A stock I own has been dropping. Should I buy more shares now that they’re priced lower? – P.L., Cerritos, California

A. You’re describing “averaging down,” in which you shrink the average price you paid for your shares by buying more at lower prices. That’s sometimes effective – such as if the entire market has swooned, taking your holding down with it through no fault of its own – or if the market seems to have overreacted to some development concerning the company. Buying more of a fallen stock can be a big mistake, though, if the stock has been dropping for good reason and is not likely to recover anytime soon. Before buying, take an extra close look at the company.

My dumbest investment

My dumbest investment occurred during my first week of investing: I lost my entire two-week paycheck in less than five minutes trying to day-trade shares of Direxion Daily Gold Miners Index Bear 2X, an apparently risky exchange-traded fund (ETF). – D.L., online

The Fool responds: Fortunately, most ETFs aren’t nearly as risky as that one. A typical ETF tracks either a market index, such as the S&P 500 or the Bloomberg Barclays U.S. Aggregate Bond index, or a category of securities, such as dividend-paying stocks, small-cap stocks or Latin American stocks. Certain ETFs, though, aim to deliver some multiple of the performance of a particular index; these are known as leveraged ETFs. Inverse (sometimes called “leveraged inverse”) ETFs hope to deliver the opposite of an index’s return. These ETFs use swaps, futures or derivatives – essentially, securities that few people understand – and they often don’t meet their performance goals.

Your leveraged inverse ETF tracked the NYSE Arca Gold Miners Index, so if that index fell by 10%, you’d gain twice that – 20%. If it rose 10%, you’d lose 20%. These ETFs are only meant to be short-term investments: They reset themselves every day and can wipe out those trying to buy and hold them. Most of us should just steer clear of 2X (“Ultra”), 3X and 4X funds. Learn more by using Google to search “leveraged ETF site:SEC.gov.”