Amazon (Nasdaq: AMZN) recently announced its first quarter results that surpassed all market expectations and sent the stock soaring. The market is very pleased with its performance. Besides increasing the stock’s price target, analysts believe that it may well be on its way to becoming a trillion-dollar company. Clearly the recent remarks by President Trump about the company did not hurt it at all.
Amazon’s first quarter revenues grew an impressive 43% over the year to $51 billion, ahead of the market’s expectations of $49.8 billion. Excluding the currency movement, the revenues would have grown 39% over the year. Non GAAP net income of $1.6 billion or $3.27 per share was also significantly ahead of the Street’s forecast of $1.26 per share. This was Amazon’s second consecutive profitable quarter. To help comprehend Amazon’s pace of growth, one must bear in mind that it was only in 2015 that the company had recorded the milestone of $100 billion in revenues.
By segment, net product sales increased 33% to $23.73 billion and net service sales increased 62% to $19.44 billion.
Amazon remained silent on the breakout of several of its segments. But it did reveal that Amazon Web Services revenue grew 49% to $5.44 billion, again significantly ahead of the $5.25 billion estimated by the market. Analysts estimate that AWS sales will double to $41 billion by 2020.
For the current quarter, Amazon projected revenues of $51-$54 billion, compared with the market’s forecast of $52.2 billion. Operating income is expected to come in at $1.1-$1.9 billion, compared with the Street’s projections of $1.01 billion.
Amazon’s Prime Growth
Till recently, Amazon had kept details of its Prime service membership base under wraps. But it recently announced that Prime now has nearly 100 million members. The company also announced a $20 price hike for the service. This was the first time it raised the price since 2014. In January this year, it had announced a price hike for the monthly membership, raising it from $10.99 a month to $12.99 a month. The annual membership will now cost $119.99 and will come into effect after June, as and when the members renew their membership.
According to Amazon, the price hike was needed to manage the costs incurred on the program – especially for the free shipping and the content streaming services. During the quarter, fulfillment expense grew 66% over the year to $7.8 billion. Recently President Trump expressed his concerns about Amazon’s use of the US Postal Service (USPS). He believes that Amazon’s agreement with the USPS is hurting the US taxpayers. He has suggested that USPS raise its parcel rates, a hike that could result in nearly $2.6 billion in extra cost for Amazon.
But some analysts are skeptical about Amazon being able to retain and grow its Prime user base at the new price. The biggest advantage for a Prime user has been the free shipping. Competitors are trying counter moves. Currently, retailers like Walmart offer a free 2 day shipping for eligible orders of value more than $35, without asking buyers to sign up for a membership plan. Also, with regards to the streaming content, if a household has already signed up with Netflix, then they are getting access to a much bigger library than Amazon Prime can offer. It would be interesting to see how the consumers react to the price hike. Our household is both a Prime subscriber and a Netflix subscriber, and we’re more than happy to pay an extra $20 to get the level of delivery service we get from Amazon. I suspect, many customers feel the same way.
Amazon’s Cloud Growth
Amazon continued to deliver robust performance within the cloud segment. According to Synergy Research Group from earlier this year, AWS accounts for 33% of the cloud infrastructure market. In view of the recent focus on data security, AWS announced that all generally available AWS services and features now comply with the European Union’s General Data Protection Regulation (GDPR).
It also launched AWS Secrets Manager, a new service that helps customers protect access to their applications, services, and IT resources. Additional enhancements during the quarter include the launch of Amazon Simple Storage Service (Amazon S3) One Zone-Infrequent Access (Z-IA). The Amazon S3 Z-IA stores objects in a single Availability Zone and can help customers lower cost to store infrequently accessed data.
AWS also announced the general availability of Amazon Transcribe and Amazon Translate, two new machine learning services that are now part of the AWS machine learning portfolio.
Amazon continued to make big acquisitions during the quarter. It announced a more than $1 billion acquisition of connected doorbell maker Ring. This was its second big acquisition since the $13.6 billion it spent on Whole Foods last year. Ring’s doorbells come equipped with audio and video equipment and can connect with other voice-enabled smart-home devices such as Alexa. In December last year, Amazon had also acquired another Wi-Fi home security camera maker Blink for an estimated $90 million. These acquisitions are helping build Amazon’s smart home offerings. It will also increase competition with Alphabet, which has been building on its Nest service that it had acquired in 2014.
The market is very pleased with Amazon’s performance. Its stock is trading at $1,572.62 with a market capitalization of $762.7 billion. Its stock touched a record high of $1,638.10 soon after result announcement. It has climbed steadily from the low of $927 that it was at, a year ago. Analysts expect the stock to climb up to $2,000 in the near future.
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