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Bigger Is Not Always Better

26 Jul 2015 | Author: | No comments yet »

Amazon reports surprise Q2 profit; stocks up by 17%.

Amazon took the retail world by surprise last week, first by producing a quarterly profit, and then by briefly turning into the planet’s biggest retailer.Amazon shares surged almost 10 percent on Friday after the e-commerce powerhouse reported a surprise second-quarter profit and a better-than-expected 20 percent jump in revenue.

Walmart, the ubiquitous American chain that Amazon overtook on the stock market, still has the edge when it comes to sales: quarterly revenue of $114bn from its bricks and mortar sprawl dwarfs the online firm’s turnover of $23.2bn. The sharp increase in shares brought Amazon’s market value to US$247.77 billion, more than its biggest rival, Wal-Mart, signaling a sea change in retailing. Amazon, which turned 20 on July 16, credited the profit to continued strength of its cloud-computing business and strong revenue growth both domestically and abroad. Nevertheless, enthusiastic investors sent the price of Amazon stock hurtling higher after Thursday’s results, in the hope that the 20-year-old online behemoth can capture even more of the online world. “It looks like they beat across every major revenue line,” said Colin Sebastian, an analyst at Baird. “That, along with the surprise profit beat, is icing on the cake, so to speak.” The share price move valued Amazon at more $250bn by Friday night – keeping it above Walmart’s market value of about $230bn, and making founder Jeff Bezos up to $7bn richer on paper, via his 18pc stake in the firm.

Based in his garage in Seattle, Mr Bezos set up the company online in 1995 as a bookseller, with a basic website offering “one million titles, consistently low prices”. The company, with 11,767 stores worldwide, still has much higher sales, US$485.65 billion in the year ended Jan. 31, compared with Amazon’s US$89 billion in annual revenue last year. Seattle-based Amazon has held a long-time strategy of investing the money it earns back into the company, resulting in quarterly losses or thin profits.

In a call with analysts, new Amazon CFO Brian Olsavsky said the company would continue to look for ways to keep costs in check while at the same time investing in “things that we think are big and important.” Amazon got a boost in revenue from Amazon Web Services, a suite of products and services offered to businesses by way of the “cloud,” or remote servers that enable users to access applications on any machine with an Internet connection. Last month, Facebook Inc became more highly valued than the world’s largest retailer, knocking it out of the top 10 list of the highest-valued companies in the Standard & Poor’s 500 index. “When it is good, it is great — particularly as the business shifted to higher growth across a matrix of operating segments, product categories and geographies in the second quarter,” William Blair analyst Mark Miller said. The firm has made a pro-forma profit in 10 of the 12 years since its first earnings, but earnings have played second fiddle to Mr Bezos’s growth ambitions. He said a variety of Amazon’s units boosted results: its US$99 annual Prime membership, third-party sellers and its logistics and delivery capabilities.

Amazon ploughs billions back into new projects, but despite its attempts to diversify, its profits also retain a traditional retailer’s dependence on seasonal spending sprees such as Christmas and Prime Day, a manufactured summer sales event held this month to drum up subscribers to its premium service. The company won’t say how many Prime members it has, but it’s estimated to be as many as 40 million, and Prime members typically spend more than other shoppers.

The Kindle, which first appeared in 2007, and the Fire, a belated and so far unsuccessful foray into smartphones in 2014, are among the few physical items on sale bearing the Amazon logo. In the three months ending June 30, Amazon’s net income was $92 million, or 19 cents per share, compared with a loss of $126 million, or 27 cents per share, a year earlier.

Analysts at Cowen & Co, which has long been a cheerleader for the firm’s potential, last week predicted that Amazon would overtake Macy’s to be America’s biggest seller of clothing by 2017. Separate financials figures for AWS have only been available since April, but the most recent stats show quarterly revenues up 81.5pc to $1.82bn, with margins of more than 21pc, as Amazon hosts the myriad businesses piling onto its home turf. Amazon has not disclosed its subscriber numbers for Prime, but finance chief Brian Olsavsky told analysts last week that the service was adding customers at rates “higher than we’ve ever seen”, with the fastest growth coming from outside the United States. “In some ways, Amazon is among the simplest stories we cover because these two areas are far and above the key.

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