A Puny Profit? Thanks, Amazon
Imagine the can't-lose position of Amazon’s chief financial officer on earnings days.
If the company posts an operating loss -- as Amazon has done for five of the last 10 quarters -- investors pat you on the back for funneling their money into promising ventures. If you report a dinky quarterly profit, as Amazon did on Thursday, Wall Street is shocked – shocked!! – and congratulates you for being incredibly disciplined with investors’ money.
Amazon’s surprise profit amounted to $79 million, which means 99.7 percent of Amazon’s net sales went poof. Its shares climbed 11 percent in after-hours trading.
Few companies are treated with this kind of deference. Amazon bulls, of course, say CEO Jeff Bezos has earned it. And one corner of Amazon validates Bezos’s approach to expensive investments that can seem bewildering for a long time.
Recall last year when investors were freaking out about slowing growth rates in Amazon Web Services, the nine-year-old cloud-computing business that lets software developers and companies pay by the hour to use Amazon’s computer networks. The operation looked at the time like a casualty of a price war with Microsoft and Google, which were aggressively pushing into a market Amazon essentially created from scratch at enormous cost to shareholders.
Now, AWS’s growth rate and margins have perked up again. Revenue rose 78 percent in the third quarter, up from an 8 percent growth rate reported a year ago. AWS generates more than half of the company’s operating profit, even though the business accounts for less than 8 percent of its net sales.
This is the business that Bezos has said could eventually have larger sales than Amazon’s core retail operation. Already, Amazon looks less like the “everything store” and more like a quite profitable computer-server farm that happens to ship toilet paper. The good news for investors is that the cloud-computing business has healthy 25 percent operating profit margins. Toilet paper, not so much.
That doesn’t mean AWS, or Amazon, is out of the woods. Microsoft in particular is targeting the biggest companies with cloud technology that is less scary to the executives holding the tech spending strings. And not every new business is going to wind up as successful as AWS. Notice the long list of bullet point items in Amazon’s results. These are things that most likely don’t make money, like Amazon’s Fire tablets and its “critically acclaimed” Web video series. (Financial analysts can't model the value of Emmys, but Amazon mentions the five won by “Transparent.”)
Investors have grown inured to Amazon’s barely profitable ways. At least for now, the company has given investors enough reasons to keep letting Amazon gamble with their money.
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