Amazon blew Wall Street’s expectations out of the water when it reported earnings for the holiday quarter, sending the company’s stock up over 12.5% in after-hours trading Thursday. The company posted profits of $3.3 billion — or $6.47 per share — compared to analysts’ expectations of $2 billion and $4.03 per share. Amazon’s (AMZN) revenue shot up 21% to $87.4 billion for the three months ending in December.
“There was little to complain about this quarter,” Jefferies analysts said in an investor note Thursday. Amazon also announced a record 150 million people now subscribe to its Prime membership program, a sign that investments in such benefits as one-day shipping and original Prime video content are paying off. “Prime membership continues to get better for customers year after year. And customers are responding — more people joined Prime this quarter than ever before,” CEO Jeff Bezos said in a statement.
The bet on one-day shipping
Amazon’s profit was widely expected to be weighed down by its continued spending to make one-day shipping standard for its Prime customers. At the end of the previous quarter, the company said it planned to invest another $1.5 billion in the service during the holiday quarter. Fulfillment costs were up 21% to $12 billion in the quarter, a sign that Amazon is “doing a good job managing these expenses,” Synovus Trust Company senior portfolio manager Dan Morgan said in an investor note Thursday.
“There are concerns that Amazon’s decision to invest in one-day delivery services will affect profitability, at least in the short run,” Morgan said, adding that it appears the company is “diligently managing” shipping and fulfillment expenses. The number of items delivered to Prime members with free one-day and same-day delivery during the holiday season more than quadrupled compared to the same period last year, Bezos said in the statement.
Amazon plans to invest an estimated $1 billion in further expanding one-day shipping in the current quarter, CFO Brian Olsavsky said on a call with analysts Thursday. “We do see expansion of this one-day program as we move through the year. Additional cities, additional routes, additional zip codes,” Olsavsky said. “I think what you’ll see in 2020 is more effort internationally … We have greatly improved our selection of one-day [shipping], particularly in Europe and Japan.”
Increasing competition in cloud
Strong retail sales in North America and in the company’s cloud division, Amazon Web Services, also helped to lift profits. Net sales in North America grew 22% to $53.7 billion in the three months, and Amazon Web Services was up 34% to nearly $10 billion. The cloud division brings in a relatively small percentage of Amazon’s sales, but it’s a key segment for the company because its high margins means it drives a majority of the company’s profits.
Amazon Web Services is in a fierce competition with Microsoft’s cloud offering, Azure, which on Wednesday posted 62% growth in the same three months. Last fall, AWS suffered a bruising loss to Microsoft when Azure was awarded a $10 billion cloud contract by the Department of Defense, after Amazon was widely expected to win the deal. Amazon has asked a federal court to temporarily block Microsoft from working on the deal.
Azure has expanded slightly faster than AWS in recent quarters but both companies’ growth numbers have been leveling off, an indication that the market has become more saturated in recent years. However, Olsavsky urged analysts on the call to focus on the total size of the AWS business, rather than its growth rate, pointing out that its full year sales grew about $10 billion from 2018.
“Any quarter-to-quarter movement is going to be a little bumpy, but generally what you’re seeing is the convergence of a lot of investment, a lot of operational efficiency, and a lot of investment on behalf of customers,” he said.
Amazon’s growing ad business
Amazon’s advertising business, which makes up the bulk of its “other” category,” was another bright spot during the quarter. The segment posted a 41% increase compared to the year earlier. The business competes with internet ad giants Google (GOOG) and Facebook (FB). “There are expectations on the Street that ads could be a big revenue driver for the company over time,” Synovus’ Morgan said, adding that regulatory scrutiny of Facebook could benefit Amazon’s ad business.