No unprofitable company gets the market as excited about its prospects as Amazon.com, Inc. (NASDAQ:AMZN). After all, AMZN didn’t make a penny in the most recent quarter, and yet, Amazon stock is soaring to all-time highs.
As we’ve noted, that’s because the market values Amazon stock on the basis of AMZN ruling the world one day. Amazon earnings don’t exist for now because AMZN pours everything it makes into building out existing businesses and entering completely new ones.
Based on the most recent Amazon earnings report, AMZN’s strategy is working like a charm.
Amazon stock surged more than 15% soon after the opening bell thanks to its quarterly report that smashed Wall Street’s expectations. True, AMZN may have posted a net loss, but Amazon finally pulled back the curtain on its cloud business, and investors were stunned by Amazon’s success so far.
The performance of AMZN’s cloud-computing business — known as Amazon Web Services (AWS) — has always been kept secret. Without anything concrete to plug into their models, many analysts figured AWS operated at a loss.
How wrong those analysts were. Not only is AWS profitable, but it’s growing more rapidly than imagined, too.
Revenue at AWS rose nearly 50% last year to $1.57 billion. That has the division on pace to record $6 billion in annual sales. Heck, AWS already accounts for almost 7% of total revenue. As Amazon’s fastest-growing business, AWS could one day eclipse the core retail division (AWS could also represent one hell of a spinoff some day).
AMZN Results Are Strong Across the Board
Business was brisk — and margins much improved — at the rest of Amazon, too. For the first quarter, total revenue increased 15% to $22.72 billion. Analysts were looking for sales of $22.11 billion, according to a survey by Thomson Reuters.
Heavy spending pushed Amazon to a net loss of $57 million, or 12 cents a share, from a year-ago profit of $108 million, or 23 cents per share. The loss beat Wall Street’s estimates for a 14-cent loss.
The early success of AWS gives added weight to the bull case on Amazon stock.
Never mind that AMZN spends with abandon, throwing money at everything from more warehouses to one-hour delivery to media production deals to smartphones that no one wants. Amazon doesn’t make a penny in profit — it’s investing for the future — but that’s by choice.
If it wanted to, AMZN could let a river of profits flow with the flick of a cost-cutting wrist. But that’s not the game plan, and it almost certainly won’t be as long as Jeff Bezos is in charge. Besides, why change anything when the market is rewarding your approach?
Amazon stock was up 25% for the year-to-date even before it went nuts on Friday. Amazon stock destroys the broader market over the trailing one-, three- and five-year periods. Heck, AMZN stock’s up 1,000% over the last decade. The S&P 500 returned less than 80% over the same span.
Not everyone is comfortable with Amazon’s strategy, of course. It’s awfully hard to like a company with no profits if you’re a value investor.
Buy if you’re comfortable with this business of empire building now and profits later, the latest quarterly earnings are excellent news indeed.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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