A year ago today, Amazon was in the doghouse with most investors. After all, it had just taken a massive writedown on its disastrous Fire mobile phone launch, which helped push its losses over the $500-million mark—more than 20 times what it lost in the same quarter the prior year. Not surprisingly, the stock took a beating, dropping more than 10%.
What a difference a year makes: On Thursday, the company turned in a quarterly earnings report that blew the doors off most analysts’ expectations, racking up its second surprise profit in a row.
Amazon has not only turned its back on the ill-fated Fire Phone, but has seen dramatic growth in several major areas of its business, including the Amazon Web Services cloud platform that many corporations use to automate much of their online operations.
Wall Street consensus estimates had projected a loss of 13 cents a share for the most recent period, but instead Amazon reported a profit of 17 cents a share or $79 million. Revenue climbed 23% to $25 billion, which was also higher than most analysts were expecting. The company’s share price—which has already risen by more than 80% in the past year—climbed another 10% or so on the news (AMZN).
As it has been for some time, the core of the growth for Amazon came from AWS, its cloud platform, which is the industry leader in offering cheap processing power and data hosting for corporations and web-based services. The cloud-computing unit generated sales of $2.09 billion, almost double the $1.2 billion it had a year earlier, and the unit had an operating profit of $520 million.
Fans of AWS have argued in the past that the unit was worth billions, but it wasn’t until Amazon started separating out the actual numbers this year that it became obvious just how large a business it is. Some investors and analysts believe, based on the revenue growth and earnings power of that division, that if AWS was a standalone business it would be worth as much as $30 billion.
“Jeff Bezos whiffed with the Fire phone last year and he realized he has to keep Wall Street happy because he pays people with stock,” Wedbush Securities analyst Michael Pachter said of the company’s improved financial results in a Bloomberg report. “The upside here is coming from less spending on stupid products like the Fire phone.”
Asked on the earnings call whether Amazon’s sudden profitability could be expected to continue, Chief Financial Officer Brian Olavsky said that the company planned to keep on re-investing the bulk of its earnings into its various business units, and that this could make financial results “lumpy” over the longer term.
“This quarter showed a lot of innovation, a lot of new products and features and a lot of investment,” Olavsky said. “We are investing very heavily in our Prime platform, we’ve launched multiple devices including e-readers, tablets under $50 and Dash buttons. So innovation and investment will continue and that can be lumpy over time.”
The other part of Amazon’s growth story is the physical distribution and logistics side of the business that includes dozens of massive warehouses. They have allowed the company to build a big business around free one-day shipping through its Prime membership service, which has seen big growth.
Running something like Prime in turn has given Amazon the know-how to branch out into more innovative services such as its Dash buttons, which let people reorder household staples by merely pushing a button attached to a wall or table. Analysts have said they expect Amazon to continue to grow in part by offering that kind of logistical and distribution expertise to outside firms as well.
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