We have reached Peak Amazon, or perhaps Prime Amazon.þþThe e-commerce company beloved by Wall Street for its fast-growing ways did something completely out of character in the second quarter: It made a profit.þþIt was only $92 million, practically a rounding error for Google or Apple. But it confirmed all the hopes and expectations of analysts and investors, who immediately pushed Amazon shares up 17 percent in after-hours trading Thursday to $566.þþThe surge added another $40 billion or so to Amazon’s market cap. That will almost assuredly propel it to be more valuable than Walmart for the first time when the stock market opens Friday, making this a deeply symbolic moment for e-commerce and the Internet. It is also a nice present for Amazon, which celebrated its 20th birthday last week.þþ“Holy cow, what a quarter,” said Jason Moser, an analyst with the Motley Fool website and an Amazon investor. “They blew that thing out of the water.”þþAmazon’s second-quarter profit amounted to 19 cents a share. A year ago, the company lost 27 cents a share. Analysts had been predicting another loss of 13 cents.þþRevenue was better than expected, too, up 20 percent to $23.2 billion. That was about $800 million more than forecast.þþOne big contribution to the improved profit and revenue was Amazon Web Services, the cloud computing division whose numbers were broken out for the first time in the first quarter. A.W.S. is the undisputed leader in the sector, outdistancing both Microsoft and Google, but analysts had been wondering if price cuts would hamper growth.þþApparently not. A.W.S. revenue rose 81 percent to $1.82 billion from a year ago, even better than it did last quarter. In the first quarter, A.W.S. revenue was up 49 percent.þþOperating income for the cloud division rose to $391 million from $77 million. No wonder analysts on a conference call with Amazon financial executives offered their congratulations.þþEven before the after-hours surge, Amazon shares were up 55 percent this year. Analysts have been rushing to upgrade their already enthusiastic ratings.þþThere seem to be only a few skeptics left.þþ“This market is just nuts,” said Sucharita Mulpuru, an analyst with Forrester Research. “Amazon’s profit is effectively 0 percent of revenue and everyone cheers. Apple grows faster and has a profit that is 20 percent of revenue, and the stock tanks. Amazon’s stock price doesn’t seem to be correlated to its actual experience in any way.”þþAmazon hired another 50,000 employees over the last year, increasing its head count by 38 percent. Many of those workers are in its network of more than 100 fulfillment centers.þþAmazon, which tends to be conservative in its forecasts, said it may once again lose money in the third quarter. It could lose as much as $480 million or make as much as $70 million, it said on Thursday. Last year, it lost $544 million in the third quarter.þþBehind all the excitement is the same story that has powered Amazon from the beginning: It is the leading e-commerce company, and e-commerce is going to be really big. Amazon’s dominant position, its admirers believe, will allow it to undercut competition and bring home large profits. In the most extreme case, it will control the delivery pipeline of goods into homes, kind of the way cable companies once controlled the flow of entertainment.þþ“Walmart has been the de facto retail king for the last 20 years,” said Mr. Moser, the Motley Fool analyst. “They were very good at bringing the consumer to the store. But technology changes so fast. What Amazon is doing is building a company focused on bringing the store to the consumer.”þþWalmart, in this view, belongs to the past, despite earning $3.3 billion in profit last quarter — more than Amazon has cumulatively earned in its entire history.þþThe losses have been generated in part by the expense of building Amazon’s pipeline, which involves using the physical distribution centers that support Amazon Prime, the $100-a-year delivery club that also throws in free entertainment, mostly movies and music. Amazon held a Prime Day sale last week that was a demonstration of Prime’s power — and also a few of its problems. Enough shoppers found fault with the selection to create a popular Twitter hashtag, #PrimeDayFail.þþMichael Pachter, managing director of equity research for Wedbush Securities, estimated Amazon took in $1.5 billion in revenue on Prime Day, versus $250 million for a typical day during the quarter.þþ“That means that they can deliver $1.25 billion of upside by scheduling a flash sale,” he said. “There’s no reason that they can’t do this once per quarter,” although he noted that no such announcement had been made.þþPrime is estimated to have about 40 million members. The real goal of the sale was to sign up even more, enticing them into being regular customers.þþ“We know it will be expensive for us in the short term,” an Amazon spokeswoman, Julie Law, told Forbes during the sale. But Amazon has never been about the short term. Maybe at 50 million members, Prime will earn big bucks for Amazon and shareholders. Maybe at 100 million. The longer it takes, the more value there will be, or so Wall Street believes.þþ“The bottom line is that with $100 billion of revenue, there is a lot of earnings power there, and they are starting to show signs that they can deliver those earnings,” Mr. Pachter said.þþAmazon might be reluctant to offer numbers, but Jeff Bezos, Amazon’s founder and chief executive, has always been explicit about this focus on expansion and investment, not profits. Free of the need to make money in the short term, Amazon can experiment — with drones, with making a smartphone, with the new Echo device that is a sort of digital companion parked in your living room.þþ“If you’re going to take bold bets, they’re going to be experiments,” Mr. Bezos said at a conference last year. “And if they’re experiments, you don’t know ahead of time if they’re going to work. Experiments are by their very nature prone to failure. But a few big successes compensate for dozens and dozens of things that didn’t work.”þþIt is a model that is hard, if not impossible, to replicate at other companies, which have trained investors to expect constantly improving quarters. And that, as many analysts note, provides Amazon with yet another competitive advantage.þ
Source: NY Times
