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Amazon Shares Jump as Cloud Unit Helps Drive Profit...

Business Maverick

Business Maverick

Amazon Shares Jump as Cloud Unit Helps Drive Profit Past Estimates

Signage is displayed outside the new Amazon Go grocery store in Seattle, Washington, U.S., on Tuesday, Dec. 6, 2016. Amazon.com Inc. unveiled technology that will let shoppers grab groceries without having to scan and pay for them -- in one stroke eliminating the checkout line. Photographer: David Ryder/Bloomberg
By Bloomberg
04 Feb 2022 0

Amazon.com Inc. reported a strong holiday quarter, calming Wall Street’s concerns that the company was headed for a slowdown.

Profit beat expectations, helped by the cloud-computing division, and investors cheered a price hike for the company’s Prime subscription service. The shares jumped as much as 19% in extended trading.The reaction highlights the importance of Amazon’s diversification from its e-commerce roots. Online store sales actually declined from last year’s blockbuster gains tied to the pandemic. Yet Amazon’s profitable cloud-computing and advertising businesses combined to more than make up for it.

“Amazon has evolved into a true platform, as more than 50% of its revenue now comes from areas outside of first-party retailing, such as cloud computing and advertising,” said Deren Baker, chief executive officer of market research firm Edge by Ascential.

Fourth-quarter sales increased 9.4% to $137.4 billion, the Seattle-based company said Thursday in a statement. Profit was $27.75 a share, aided largely by a pretax gain from the company’s investment in Rivian Automotive Inc. which went public in November. Analysts, on average, projected revenue of $137.8 billion and earnings of $3.77 a share, according to data compiled by Bloomberg.

Amazon in October had warned investors it would spend billions in the holiday period to ensure packages got to customers amid supply-chain bottlenecks and an acute labor shortage. A lot of that spending went into hiring 140,000 workers — just short of its goal of bringing on 150,000 recruits during the quarter. Amazon also lavished bonuses on workers, dispatched half-empty vehicles if it meant getting packages to customers on time and secured space on any ship it could find — a spending spree that totaled $22.4 billion.

The massive outlays helped reinforce the value of Prime membership with customers, giving the company confidence to raise the price by $20 to $139 a year — the first such increase since 2018. Prime, which offers subscribers shipping discounts, video streaming and other perks, helps Amazon convert occasional shoppers into loyal customers. Prime subscribers typically spend more on Amazon than non-members.

Read more about the Prime price hike

“As expected over the holidays, we saw higher costs driven by labor supply shortages and inflationary pressures, and these issues persisted into the first quarter due to omicron,” CEO Andy Jassy said in the statement. “Despite these short-term challenges, we continue to feel optimistic and excited about the business as we emerge from the pandemic.”

Amazon Online Stores Revenue

Shares rose to a high of $3,300 in extended trading after closing at $2,776.91 in New York. The stock has dropped about 17% this year, underperforming the dip of 6% in the S&P 500 Index.

Amazon’s results landed amid a gripping week for Big Tech earnings. Apple Inc.Microsoft Corp. and Alphabet Inc. all reported strong results. But Meta Platforms Inc. suffered the worst single-day share plunge in its history Thursday, a day after reporting slowing user growth in its signature Facebook app.

Amazon’s most profitable unit, the Amazon Web Services cloud-computing division, generated sales of $17.8 billion, a 40% year-over-year increase, and operating profit of $5.29 billion, topping estimates. Advertising revenue was $9.7 billion, a 32% increase from a year earlier. It was the first time the company disclosed advertising as a separate line item. Previously it was part of the “other” revenue category.

Online store sales declined about 1% to $66.1 billion. Revenue from services Amazon offers third-party merchants increased 11% to $30.3 billion.

“Every single drop of profit is being generated by the mushrooming Amazon Web Services cloud business,” said Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown. “It’s hard not to admire the business model. However, no one should lose sight of the fact Amazon is supposed to be a retail giant, and it’s not the greatest look for the support act to be seen keeping profits afloat.”

In the period ending in March, Amazon projected revenue will be $112 billion to $117 billion. Operating profit will be as much as $6 billion. Analysts, on average, estimated sales of $120.5 billion and earnings of $6.06 billion.

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