Originally published by Sramana Mitra on LinkedIn: Newly Profitable Amazon Kicking A$$

It may have been a disastrous quarter for tech stocks. Most companies including powerhouses such asAlphabet, Microsoft, and even Apple reported disappointing results. But one company that continued to surge unscathed is Amazon (Nasdaq: AMZN). Analysts are impressed with Amazon's newfound profitability and it continues to take further moves to ensure that its bullish days are here to stay.

Amazon's Financials

Amazon's first quarter revenues grew 28% over the year to $29.1 billion, compared with the market's expectations of $27.99 billion. EPS of $1.07 was also significantly ahead of the Street's forecast of $0.58 per share.

Amazon mostly has its cloud service Amazon Web Services (AWS) to thank for the impressive results. By segment, net product sales increased 20% to $20.58 billion and net services sales grew 51% to $8.55 billion. During the quarter, revenues from AWS grew 64% over the year to $2.566 billion and operating income from the division nearly tripled to $716 million.

For the current quarter, Amazon projected revenues of $28 billion-$30.5 billion, ahead of the market's forecast of $28 billion. It forecast an operating income of $375 million-$975 million, compared with the Street's projections of $857 million.

Amazon's Continued Improvements

During the quarter, Amazon made significant advancements both within its product and services categories. It recently introduced Kindle Oasis, the thinnest and lightest Kindle which, besides the advantage of its size comes with a charging cover that is able to deliver months of battery life. Kindle Oasis is 30% thinner and more than 20% lighter than any other Kindle that Amazon has released so far.

Amazon is also pushing forth its voice-enabled offering Alexa. It announced the launch of two Alexa-enabled devices: Amazon Echo Dot and Amazon Tap. Amazon Echo Dot is a hands-free, voice-controlled device that works on Alexa and at $90 is priced at nearly half the price of Echo. Also, unlike Echo, the user can plug the Echo Dot into their own speakers and even connect to them through Bluetooth. Amazon Tap is a portable Bluetooth and Wi-Fi speaker with a built-in Wi-Fi system and operates on the Alexa operating system. The device is priced at $130 and comes with Duel-firing Dolby speakers to deliver 360-degree quality sound.

During the quarter, Amazon continued to add to Alexa's offerings by adding additional new capabilities such as the ability to order car from Uber, a pizza from Domino's, getting fitness information from Fitbit, checking credit balances with Capital One, and receiving news alerts from NBC News. The service has also been integrated with other home systems such as Nest, ecobee, Insteon, and Honeywell to allow customers to manage thermostat settings in their homes through a voice command. Amazon tied up with Spotify Premium and now Spotify subscribers can listen to music on Echo and use Alexa to select their playlist.

To attract more video subscribers to their site, Amazon began offering a monthly subscription for the Prime videos. The subscription is expected to help Amazon compete with Netflix. Amazon is also improving its content line-up with the same intention. Amazon Studios acquired the rights to several films including Woody Allen's Café Society, Whit Stillman's Love & Friendship, and 2016 Sundance Film Festival titles Manchester by the Sea, Gleason, Author: The JT Leroy Story, and Wiener-Dog. Its original content continues to grow as it released its second original live-action kids' series Just Add Magic.

It continues to add other niche services including Style Code Live, a daily live show focused on fashion and beauty that gives information on trends and tips from style experts and comes with interactive features like live chat. The show is streamed live for free. It is hosted by Lyndsey Rodrigues, Rachel Smith, and Frankie Grande, and features guests such as Meghan Trainor, Karolina Kurkova, Lauren Conrad, Whitney Port, and Molly Sims.

Amazon's Cloud Initiatives

Amazon Web Services also continued to build on its market share through several enhancements. It released Amazon Lumberyard, a free, cross-platform, 3D game engine that allows developers to create games that can store and compute by connecting directly to the AWS Cloud. The service helps developers provide real-time effects for their graphics. They also announced the general availability of the AWS Database Migration Service, a fully managed service that will allow customers to migrate their production Oracle, SQL Server, MySQL, MariaDB, and PostgreSQL databases from on-premises data centers to any of these engines or Amazon Aurora on AWS with no downtime.

Amazon has benefited greatly from the success of AWS. Currently, AWS is a $10 billion business and delivers a 23% operating margin compared with 12% a year ago. According to a Synergy research report released last week, AWS continues to be the leader in the cloud market with nearly 31% of the global market share. Google and IBM together account for the next 22% of the market and the next 20 players in the market account for a combined 27%.

Amazon's cloud strategy has paid off well so far. While it continues to build on that, it wouldn't be a bad idea if it went scouting for some acquisitions in its other areas. Given its increased focus on the video streaming segment, I think Amazon could look to acquire Netflix. Earlier this year, Netflix began offering its services to almost all international markets. Currently Amazon's video streaming service is available in few international markets. Besides viewership, Amazon could also benefit from the high quality content that Netflix offers.

Another potential acquisition for Amazon could be Pinterest. The social media site allows users to create a list of things they like by "pinning" images on their wall. Amazon would be able to leverage the wish list of users and integrate it with its e-commerce business to sell these goods directly to the users.

But at current valuations, both of these are expensive buys for Amazon. Pinterest, despite its modest revenues of $169 million is valued at $11 billion and Netflix is valued at $41 billion. While Pinterest's valuation is likely to downshift with the adjustment in the Unicorn market, Netflix is a public company. $50 billion is a big price for Amazon to pay for Netflix considering that it ended the quarter with $12.5 billion cash in hand, but the synergy is unmistakable. Pinterest, of course, can be acquired for cash, even at a $11 billion price.

Amazon's stock is currently trading at $683.85 with a market capitalization of $322.5 billion. It touched a record high of $696.44 at the end of last year and has recovered significantly from the 52-week low of $414.55 it had fallen to in May last year.

 

Published on: May 6, 2016