Amazon (NASDAQ:AMZN) shocked Wall Street and proved its strategy of infrastructure investment works. A monster quarter sent shares up over 11%.
Net income of $3.3 billion, or $6.47 per share fully diluted, on sales of $87.4 billion blew away earnings estimates.
This sent the shares up $210 each in after-hours trading, taking the market capitalization above $1 trillion. Amazon becomes the fourth of the major cloud companies to rise decisively over the $1 trillion mark. It trails Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), but it should pass Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which reports Feb. 3.
The most important numbers came later from Synergy Research. Amazon’s share of the cloud market remains steady at 33%, and revenues for Amazon Web Services grew 34% year-over-year.
Why the Skepticism?
What was surprising about the numbers was the market’s surprise. Amazon grows because it continues investing in its business, over $5.3 billion in the last quarter, almost $17 billion for the full year.
Most of that investment now comes in the form of delivery vans and warehouses. Amazon can now fulfill same-day orders for 72% of the U.S. population. There were an estimated 105 million Prime members in the United States, paying about $12.5 billion. Net income for the whole company in 2019 came to $11.6 billion, meaning operations are close to break-even. This is similar to Costco Wholesale (NASDAQ:COST), whose net income and membership revenue are also close.
Why the Cheering?
The big cheers from investors came for Amazon Web Services. For the quarter it delivered $2.6 billion of net income on nearly $10 billion of revenue. Analysts usually estimate the value of cloud at 10 times revenue. This means the bulk of the company, even on Jan. 31, is valued at just $650 billion on about $240 billion in revenue.
The number of industries that Amazon now dominates is staggering. Alexa is the biggest spoken interface. Prime is now one of the biggest TV networks, not just in the U.S. but globally. There are over 40 million users of Amazon Fire TV. Amazon Music now has 55 million subscribers. There are over 550,000 sellers on its Indian marketplace. Over 700,000 Indians have been employed through Amazon, and its largest office is now in Hyderabad.
Amazon’s didn’t mention its future growth in the earnings release, because it hasn’t happened yet. It also didn’t mention the company’s Haven healthcare operation. Nor is PillPack, its online pharmacy. Amazon’s fintech operations, including revolving credit through JPMorgan Chase (NYSE:JPM), isn’t mentioned. Amazon’s advertising operations are also not highlighted in the quarterly report.
There’s Still More to Do
There remain weaknesses in the portfolio that could provide new opportunity. Amazon’s move into groceries continues to sputter. This is despite Amazon Fresh deliveries now becoming part of Prime. Microsoft continues to slowly gain in the cloud, despite Amazon’s growth.
The pushback against Amazon continues to strengthen. Employees claim they are being censored. One of its employees wants Ring doorbells shut off immediately over privacy concerns. The European Union is investigating how Alexa collects and uses data.
The United Kingdom is imposing a “digital tax.” Seattle is trying to impose a “head tax.” Maryland wants to tax digital ads. Politicians continue to harp on how Amazon uses local tax breaks to avoid taxation.
The Bottom Line on Amazon Stock
Amazon continues to grow because it continues to invest in its business. Despite growing criticism, Amazon doesn’t crush industries. It enables them, creating efficiency.
Amazon proved in 2019 that investing in infrastructure, beyond the cloud, can get a return. It would be nice if other companies stopped complaining and did the same.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, AAPL, JPM and MSFT.