Amazon now a front-runner to $1trn market value amid stellar profits

JOHANNESBURG — Tech giant Amazon is probably (after Apple) the world’s most incredible business right now. The company’s first-half net income has topped just over $4bn. A key factor to Amazon’s success has been its focus on its cloud infrastructure offering Amazon Web Services (AWS), which generates about 50% of the group’s operating income. I was fortunate enough to attend the AWS Cape Town Summit a few weeks ago and was blown away by the attendance as well as the sheer extent of big-name local clients AWS has on its books (Pick n Pay, Mix Telematics – just to name a few). Also, AWS has a big presence in Cape Town and even Johannesburg, with thousands of staff in South Africa. – Gareth van Zyl

By Spencer Soper

(Bloomberg) – Amazon.com Inc. investors have traditionally given it a pass on money-losing quarters and narrow profit margins so long as revenue growth kept surpassing expectations. That dynamic flipped on Thursday, propelling the 24-year-old company into a potentially steadier phase.

Amazon reported a record second-quarter profit of $2.53 billion, or $5.07 per share. The Seattle-based company has generated net income of $4.16 billion in the first half of this year, more than the previous seven quarters combined, according to data compiled by Bloomberg. In 2014, Amazon lost $131 million.

Jeff Bezos, Chief Executive Officer of Amazon.com Inc. Photographer: Matthew Staver/Bloomberg

The results demonstrated that Chief Executive Officer Jeff Bezos and his management team can finesse a massive global enterprise with about $200 billion in annual sales and more than half a million employees.

Even though second-quarter sales of $52.9 billion came in slightly below estimates of $53.4 billion, investors remain enthused, focusing instead on soaring profit that came in at more than double analysts’ projections.

“We want to see that when there’s a slight slowdown in sales, those profits expand,” said Josh Olson, analyst at Edward Jones & Co. “That’s the strength of this management team. They know when to step up spending and when to pull back. That gives us faith in the long-term story because eventually all of Amazon’s growth opportunities will come to an end.”

Chief Financial Officer Brian Olsavsky said growth of the Amazon Web Services cloud computing division and advertising sales propelled profit. Both businesses are more profitable than Amazon’s main e-commerce operation.

The retail business is also becoming more profitable thanks to job cuts earlier this year and a reorganisation enabled by automation of tasks once handled by people. Amazon uses robots rather than people to shuffle inventory around its warehouses, and algorithms to power inventory decisions once made by white collar workers.

Those changes let Amazon staff up growing departments without hiring lots of new people since it can transfer existing workers from other functions where they’re no longer needed. Amazon even trimmed losses in its international business while funding expansions in India, Australia, the Middle East and Brazil.

For most of Amazon’s existence, Bezos preached almost constant investment in new businesses at the expense of near-term profit. The company got low on cash during its early years and was often the subject of heated debate among investors over whether it would ever generate sustained earnings. Supporters regularly cited the company’s sales growth and said Amazon’s huge scale would eventually pay off.

Amazon’s size certainly helps these days. When the company delivers a package to a customer, it’s likely to pass many other customers’ homes nearby, spreading shipping costs across a larger revenue base. But new businesses have helped too. AWS began to take off about a decade ago and now generates more than half of Amazon’s operating income. Advertising is a newer business, but promises similar benefits.

That all means investors no longer shudder when sales growth falters. In the second quarter, worldwide paid units growth, a key metric of e-commerce momentum, was 17 percent, slowing for the fourth consecutive quarter. Amazon shares rose 3.2 percent in extended trading anyway.

Olsavsky attributed the slowdown to a difficult comparable period a year ago when Amazon lowered the price threshold for free shipping, responding to competitive pressure from Walmart Inc.

One factor that reduces Amazon growth while boosting profit is rising sales from independent merchants posting their own inventory on Amazon’s marketplace. Those sales are more profitable for Amazon since it takes a commission along with fees for warehouse storing, packing and delivery – without the risk of buying inventory.

“We’re seeing a lot more third-party transactions, which is why the revenue missed but the profits are so good,” said RJ Hottovy, an equity analyst at Morningstar Inc.

Amazon’s stock has more than tripled in the past three years, making Bezos the richest person on the planet. It’s the world’s second-most valuable public company now behind Apple Inc., making it one of the front-runners in the race to reach $1 trillion in market value.

Investors have placed tremendous faith in Amazon’s ability to find new customers and squeeze more money from existing users by offering them new products and services. It purchased online pharmacy PillPack last month, which followed its $13.7 billion acquisition of Whole Foods last year to jump start its struggling grocery business. Olsavsky said marketing in Whole Foods is creating new members for Amazon’s Prime subscription. “It’s the fastest we’ve ever seen,” he added.

Amazon’s momentum has been strong enough to sustain Twitter broadsides from US President Donald Trump, who has accused Amazon of freeloading off the US Postal Service and using the Washington Post as a lobbying tool against antitrust criticism. Bezos owns the Washington Post, which frequently publishes hard-hitting investigative pieces about Trump and his administration.

Revenue from Amazon Web Services, its profitable cloud-computing division, jumped 49 percent to $6.1 billion. Growth, which Amazon reports without the impact of currency changes, was 48 percent in the first quarter.

Sales from other businesses – mostly advertising – surged 129 percent to $2.2 billion, just below the growth rate from the first quarter.

Amazon has more than 100 million Prime subscribers who pay yearly or monthly fees in exchange for fast shipping, video and music streaming and digital photo storage. Members spend more than non-members. Subscription services revenue, which is mostly from Prime, soared 55 percent to $3.4 billion. First-quarter growth was 56 percent.

Amazon will capture nearly half of all online spending in the US this year, according to EMarketer Inc. Bezos is trying to convince investors that he can replicate that US dominance overseas. That still takes a lot of spending upfront: Second-quarter operating expenses rose 34 percent to $49.9 billion. That was just below Amazon’s revenue growth rate.