Keep riding the Amazon tiger – growing profit margins tell us the best is yet to come.

LONDON — When we launched the Biznews Global Share portfolio in December 2014, easily the smartest call was to put 8% into Amazon at a the then $328 a share price. It stemmed from a belief in the superiority of its business model which uses technology the deliver an ever improving value proposition to customers over whom it obsesses. In a world where consumers are too often viewed by businesses as bags of kilojoules with wallets, Amazon has always been refreshingly different. Almost four years since our investment, the Amazon price has surged 378% to above $1 550 – and our best decision was simply stay aboard for the ride. In our recent portfolio update webinar (transcript and video is on Premium) I described this approach as simply following the “Koos Bekker” playbook – mimicking Naspers chairman’s rejection of repeated demands by traders that his company to take profits on its Tencent investment. In March, Naspers finally sold two percentage points of its stake, reducing it from 33% to 31%. That sale, to fund higher yielding bets elsewhere, realised 333 times the SA media group’s total initial investment. Which proves the point that sometimes the best investment decision is to do nothing. As we have done with our portfolio’s Amazon stake. And you’re sure to agree with after reading this excellent assessment of its prospects in the wake of the most recent results-driven share price surge. – Alec Hogg    

By Shira Ovide (Bloomberg Gadfly) —

It is awesome to be Jeff Bezos.

The Amazon.com Inc. CEO is the world’s richest person. He has a meme-worthy physique. And investors love him when he shows them the tiniest bit of profit love.

Amazon on Thursday reported a dinky 3.8 percent operating profit margin on more than $51 billion in sales. It was the highest operating profit margin since the middle of 2016, but it’s still laughably small compared with a company like Facebook and its 45 percent margins. Amazon also projected second-quarter operating profit that was higher than most Wall Street forecasts.

Amazon shares had already climbed more than 67 percent in the last year, and they shot up about 6 percent in after-hours trading on Thursday. Yup, Being Bezos is pretty grand.

Amazon has a reputation for spending as much money as it can get its hands on, and that reputation is deserved. The company has poured money into building up its e-commerce business in India and other international markets, its cloud-computing business, its Echo line of voice-activated gadgets, programming for its web video service and its packing, sorting and shipping logistics.

Read also: WORLDVIEW: Brilliant Bezos – advice for all of us from the world’s best entrepreneur

That is quite a list of spending priorities, and it shows in Amazon’s results. The company’s core operating expenses — excluding its cost of sales covering items like payments for products that Amazon sells online — is consistently growing faster than Amazon’s rapidly growing revenue. Revenue in Amazon’s first quarter rose 43 percent from a year ago, which didn’t include sales from the Whole Foods supermarket chain. Amazon’s core operating costs climbed even faster at nearly 50 percent. This cost line has been inching up gradually, and the increase in the first quarter was the fastest rate since at least 2012.

What has changed, however, is that Amazon is becoming a fundamentally more profitable company. I know that’s a weird sentence to read about a company with less than 4 percent operating profit margins. But what I mean is that Amazon’s gross profit margin — its revenue minus basic costs to purchase products, buy packing supplies and grab digital video programming — is growing. Gross margin was nearly 40 percent in the first quarter compared with consistent margins in the 30 percent range for several years.

The growing gross margins are great news for Amazon investors who have long been starved for profits. As Amazon expands its sales from cloud computing, digital advertising, Prime subscriptions and the middleman fees from merchandise sold by independent companies, it is getting a bigger share of sales from naturally higher margin businesses than Amazon’s original identity as an online store. (Another boon to Amazon’s gross profit margin: The company said on a conference call with stock analysts that it plans to increase the annual fee for Prime membership to $119 from $99. Amazon already generates about $11 billion in yearly revenue from Prime fees and other Amazon subscriptions like those for Audible.)

Amazon has also been squeezing the companies whose goods are sold on its virtual mall, which gives Amazon better economics. And no doubt as Amazon grows as huge as Bezos’s biceps, it’s figuring out how to squeeze more efficiencies as it flings packages around the world.

Read also: Naspers CEO Bob van Dijk on THAT $10.6bn Tencent sale, scaling up e-commerce

The end result is Amazon can, if it curtails its investment spending, become a fundamentally more profitable company than it was in the days when it bought merchandise and resold it at a markup.

Macquarie Capital’s Benjamin Schachter pointed out this week that Amazon in this way is the flip side of Google parent company Alphabet Inc. Google started out in the highly profitable digital advertising business. Almost anything else that Alphabet does — making gadgets for the home, offering cable TV-like subscriptions online and selling cloud computing to businesses — may come at lower profit margins.

Amazon is the reverse. Its core e-commerce business has posted such low margins — in many cases by Amazon’s design, it should be said — that almost anything new that Amazon does will have higher margins. That includes its cloud computing business and making gadgets for the home, the same businesses that are dragging down Alphabet’s profit margins.

Bezos is closely watched in Silicon Valley for his business savvy. In subtly changing his company into a beast with improved economic fundamentals, he’s found another way to have the last (famously cackling) laugh.

Visited 91 times, 1 visit(s) today