Amazon turns investor attention from growth to big profits

Bloomberg

Amazon.com Inc. investors have traditionally given it a pass on money-losing quarters and narrow profit margins so long as revenue growth kept surpassing expectations. That dynamic flipped, propelling the 24-year-old company into a potentially steadier phase.
Amazon reported a record second-quarter profit of $2.53 billion, or $5.07 per share. The Seattle-based company has generated net income of $4.16 billion in the first half of this year, more than the previous seven quarters combined, according to data compiled by Bloomberg. In 2014, Amazon lost $131 million.
The results demonstrated that CEO Jeff Bezos and his management team can finesse a massive global enterprise with about $200 billion in annual sales and more than half a million employees.
Even though second-quarter sales of $52.9 billion came in below estimates of $53.4 billion, investors remain enthused, focussing instead on soaring profit that came in at more than double analysts’ projections.
“We want to see that when there’s a slight slowdown in sales, those profits expand,” said Josh Olson, analyst at Edward Jones & Co. “That’s the strength of this management team. They know when to step up spending and when to pull back. That gives us faith in the long-term story because eventually all of Amazon’s growth opportunities will come to an end.”
Chief Financial Officer Brian Olsavsky said growth of the Amazon Web Services cloud computing division and advertising sales propelled profit. Both businesses are more profitable than Amazon’s main e-commerce operation.
The retail business is also becoming more profitable thanks to job cuts earlier this year and a reorganisation enabled by automation of tasks once handled by people. Amazon uses robots rather than people to shuffle inventory around its warehouses, and algorithms to power inventory decisions once made by white collar workers.
Those changes let Amazon staff up growing departments without hiring lots of new people since it can transfer existing workers from other functions where they’re no longer needed.
Amazon even trimmed losses in its international business while funding expansions in India, Australia, the Middle East and Brazil.
For most of Amazon’s existence, Bezos preached almost constant investment in new businesses at the expense of near-term profit. The company got low on cash during its early years and was often the subject of heated debate among investors over whether it would ever generate sustained earnings. Supporters regularly cited the company’s sales growth and said Amazon’s huge scale would eventually pay off.
Amazon’s size certainly helps these days. When the company delivers a package to a customer, it’s likely to pass many other customers’ homes nearby, spreading shipping costs across a larger revenue base. But new businesses have helped too. AWS began to take off about a decade ago and now generates more than half of Amazon’s operating income. Advertising is a newer business, but promises similar benefits. That all means investors no longer shudder when sales growth falters.
Amazon’s stock has more than tripled in the past three years, making Bezos the richest person on the planet. It’s the world’s second-most valuable public company now behind Apple, making it one of the front-runners in the race to reach $1 trillion in market value.