Amazon.com, Inc. closed at a life-time high on Tuesday. The stock has so far recorded the second largest year-to-date gain in the S&P 500, trailing only streaming rival Netflix, Inc. . Investors are convinced that Amazon’s days of meager earnings are over. The future looks rosy. The future looks profitable.
But has the profit bandwagon actually taken off? Or are investor expectations belying past evidence?
Profit at the End of Amazon Tunnel
Investing in Amazon.com, Inc. has always been an act of faith. The online retailer’s annual sales over the past decade have grown over ten-fold to almost $90B in 2014. But earnings have at best been sporadic. Regardless, investors have remained steadfast in their belief that significant profits are just around the corner.
2015 has been that year when many believe their bets are finally paying off. Operating income for the 12-month ended September 30 touched $1.7B, versus just $97M a year ago. And analysts expect the positive momentum to continue, with operating income forecast to hit $4.5B next year.
The recently ended holiday shopping season offered investors plenty more reasons to cheer. Earlier in the week, Amazon boasted that millions joined its Prime network amid blockbuster sales of its flagship products, such as the Fire tablet.
The majority of Amazon’s recent profits have come from its rapidly growing cloud unit. Amazon Web Services saw revenue surge 70% y-o-y to $5.5B for the nine-month ended September 30. Companies are rapidly shifting to cloud and Wall Street projects AWS’s annual revenue to come in at around $12B in 2016. No wonder investors are rejoicing that Amazon’s days of profitability are finally here.
Amazon Could Suffer a ‘Cloud Burst’
But if history is any proof, Amazon.com, Inc. is highly unlikely to sit on its profit plaudits. Jeff Bezos has been known to adopt a strategy of investing and cutting prices to expand his market share. The cloud business will be no exception. In fact, that process has already begun.
AWS’s operating margin dropped last year to low as 8% following a bout of price cuts. With competition heating up, and rivals Google and Microsoft making a sustained push into cloud, more such cuts at AWS look inevitable. Add to that, Amazon’s continued investment in retail operations, and the margins are likely to drop even further.
To be fair to Amazon investors, they have always focused on the top-line. This year’s glimmer of bottom-line hope is making everyone excited. But that excitement may be short-lived if Bezos and his team resort to their old tactics of giving market domination precedence over profitability.