Seattle-based Internet giant Amazon.com (NASDAQ: AMZN) blew away analysts’ expectations on Thursday when it reported revenue of $25.4 billion, up 23% year-over-year. Earnings per share of 17 cents easily surpassed expectations of a 13-cent loss.
Amazon’s stock price surged as much as 10% to $619.45 on Thursday, reaching a new record high. And Amazon’s Friday close of $599.03 represents a 93% year-to-date gain.
Now, the question is whether Amazon can continue this growth, or if it was a fleeting surge.
Following the failure of the Fire Phone, Amazon seemed content to continue spending away profits for capital investment in the name of future growth.
Amazon is proving that investors perhaps are not so obsessed with short-term profits and are willing to stick around in the name of future growth. Although Amazon has had a history of varying earnings reports, CEO Jeff Bezos has proved his reliability to investors with a steadily rising stock price that hasn’t had a significant stumble since 1999.
Amazon’s backbone is its retail e-commerce business where it made its name. However, those previously mentioned capital investments have been spent on a number of projects. To say the least, Amazon has had its fair share of stumbles outside of its core retail business.
Kindle e-readers haven’t proved to be a significant profit source. Original television programming hasn’t lived up to competitors like HBO, excluding the Amazon series “Transparent.” As mentioned, the Fire smartphone was a failure.
With low retail margins and free shipping, Amazon needs a winner to subsidize its retail business.
Amazon’s Secret Weapon
So, what is working for Amazon? The third-quarter earnings report answered that question. Amazon Web Services, or AWS, is a home run.
AWS has hit its tipping point and is now revealing to investors its profitability. Competitors in cloud service computing have not been able to keep up.
Amazon’s extensive cloud computing network likely began as an internal project to support Amazon Prime membership perks like video streaming. Offering cloud storage to third parties at a cost was a way to subsidize the build-out of its own cloud computing services.
However, cloud computing became an increasingly large market, and Amazon was already ahead. Nearly every major technology company is looking toward cloud services for future growth. And nearly every company in the future will be operating in the cloud.
Amazon is far ahead of the competition with more market share and more capacity. Amazon has eight times more market share than its next top closest competitor. It also has four times more cloud computing capacity than the next 14 largest cloud service providers combined.
With revenue of $2.1 billion, AWS makes up a small percentage of Amazon’s total revenue, but it is exceedingly more profitable and growing rapidly.
Retail Business Boosted by Amazon Prime Success
While AWS is given the credit for the sweeping earnings report, Amazon’s retail business shouldn’t be overlooked. Amazon got its start selling books and has since expanded to millions of items for sale through its site.
An estimated 40% of regular customers are signing up for Amazon Prime, its free-shipping membership which includes other perks such as video streaming and music for $99 per year. These customers spend on average $800 per year on Amazon.com.
With the growing potential of AWS and Prime memberships, Amazon’s growth is likely to continue. Its consistent investments in the future – even while creating a few flops – is also proving to pay off and should continue to do so.
While it is unlikely that this is the end to varying profitability of Amazon earning reports, Bezos is making decisions for the long-term success of Amazon, not short-term gains to satisfy Wall Street expectations.
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