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Amazon Fires on All Cylinders

Posted on Monday, Feb 6th 2017

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Amazon (Nasdaq: AMZN) has reported its seventh straight quarter of profit and beat earnings estimates. All this, thanks to its hugely profitable cloud segment, Amazon Web Services (AWS).

Amazon’s Financials
Amazon’s fourth quarter revenues grew 22% over the year to $43.7 billion, compared with the market’s expectations of $44.68 billion. EPS of $1.54 beat the Street’s forecast of $1.35 per share. Net income increased to $749 million from $482 million a year ago. Operating income increased 13% to $1.3 billion.

By segment, net product sales increased 15% to $30.63 billion and net services sales grew 43.7% to $13.11 billion.

Amazon ended the year with net sales growing 27% to $136 billion and net income increasing 302% to $2.4 billion or $4.9 per diluted share. Operating income grew 91% to $4.2 billion.

Amazon’s headcount increased by 48% or 111,400 during the year to take the total to 341,000. It plans to add 100,000 more jobs over the next 18 months. Five years ago, Amazon employed just 32,000 people globally and now its hiring spree in one year rivals Microsoft’s total headcount of 120,000.

For the current quarter, Amazon projected revenues of $33.25 billion-$35.75 billion with operating income of $250 million-$900 million. The Street was looking for revenues of $27.7 billion with an operating income of $665 million.

AWS Initiatives
AWS, the profit engine of Amazon, continued to grow with millions of active customers. It added Workday, Salesforce, Capital One, Financial Industry Regulatory Authority (FINRA), McDonald’s, and others to its list of enterprise customers. Operating income was $926 million on $3.53 billion (up 47%) in revenue in Q4 2016. For the full year 2016, operating income was $3.1 billion (up 55%) on revenue of $12.3 billion.

AWS accelerated its infrastructure expansion in 2016, opening 11 Availability Zones across five geographic regions in the US, Korea, India, and most recently, Canada and the UK. It now operates 42 Availability Zones across 16 infrastructure regions globally and plans to open an additional five Availability Zones in France and China.

AWS has announced three AI services: speech recognition and natural language understanding service Amazon Lex, text-to-speech engine Amazon Polly, and image recognition service Amazon Rekognition. AWS also announced a significant investment in MXNet, an open source distributed deep learning framework. It also announced Amazon Athena, a pay-as-you-go, interactive query service for analyzing semi-structured data such as clickstreams and logfiles and the GA of Amazon QuickSight, a cloud-powered business analytics service.

Amazon’s E-commerce Initiatives
During the quarter, Amazon introduced Amazon Go in Seattle, a new kind of store where customers can just pick up the products they want and walk out without any checkout. This experience is made possible by the same type of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning.

In the second half of the year, Amazon stepped up its investment in Prime benefits, such as Prime Now, AmazonFresh, Alexa and Echo devices as well as digital video content. It now offers Prime Video to customers in more than 200 countries. Amazon Studios has won two Golden Globes: Casey Affleck (Best Actor) for Manchester by the Sea and Billy Bob Thornton (Best Actor in a TV Series) for Goliath. It was also nominated for seven Academy Awards, including Best Picture (Manchester by the Sea), Best Director (Kenneth Lonergan), and Best Foreign Language Film (The Salesman).

Its Fulfillment by Amazon (FBA) is also seeing good traction. It delivered more than two billion units on behalf of sellers in 2016, and the number of active sellers using FBA grew more than 70%. It has over 100,000 sellers, and in Q4 FBA units represented over 55% of total third-party units. However, there are rising concerns that Amazon has failed to stop the circulation of counterfeits.

Amazon has also launched a revamped and expanded version of a Pinterest-like feature called “Interesting Finds” which offers shoppers a curated feed of products across a number of categories. Pinterest, which is struggling to monetize its more than 150 million monthly users, could actually be a good acquisition prospect for Amazon, which ended the quarter with a cash balance of $19.3 billion.

Creating and keeping jobs in the US has been one of the points of contention between Trump and Silicon Valley companies. Trump has also questioned Amazon’s tax practices and Bezos’ interest in acquiring The Washington Post. Amazon’s massive hiring plans could help land it in Trump’s good books.

The market is worried about Amazon missing the revenue estimate in the holiday season, but I believe it is a minor hiccup for a winner. Its stock is trading at $810.20 with a market capitalization of $371.3 billion. Its 52-week range is $474-$847.21.

Photo Credit: simone.brunozzi/Flickr.com

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