Cloud // Infrastructure as a Service
News
4/28/2014
10:04 AM
Connect Directly
Twitter
RSS
E-Mail
50%
50%

Amazon Faces Profit Pressure: Honeymoon Over?

Amazon touts growth, but investor patience grows thin as shareholders search for a sign of profits.

8 Data Centers For Cloud's Toughest Jobs
8 Data Centers For Cloud's Toughest Jobs
(Click image for larger view and slideshow.)

Amazon.com's sales were up 23% in its first quarter of 2014, but it seemed to be profits that its stockholders were looking for this time around. Shareholders had previously been able to ignore the fact that they were paying a premium for a stock in a company that had skimpy or no profits at all. Instead, they could point to the healthy rate of growth that Amazon kept displaying. But profitability seemed to rear its head in the stock market's reaction to this year's first quarter. Amazon's shares were down nearly 10%, or $33.32 per share, to $303.83 at the close of the first day's trading following the announcement on April 24.

Overall sales in the first quarter once again posted a big rise, to $19.74 billion from $16.07 billion in the first quarter of the year before.

But operating income decreased 19%, to $146 million, compared to $181 million in the first quarter of 2013. The first quarter's operating income would have been even lower, below $130 million, if favorable exchange rates hadn't driven money to the bottom line. Net income or profit was a modest $108 million, or 23 cents per share, compared to $82 million, or 18 cents per share the year before.

"Perhaps more unnerving was the company's forecast for next quarter: flat revenue and a loss that might be as big as $455 million," wrote James Stewart in the New York Times on April 25. The stock plunged 9.9% and he questioned whether investor patience had worn thin. "Is a 20-year honeymoon coming to an end?" he asked.

Maybe not. Amazon's stock has bounced back from reverses before because the company occupies such a strong position in both online retailing and providing cloud services. On the other hand, its stock dropped 9.5% in trading the day after it reported revenues grew 20% in 2013. That drop was from a high for the year of $403. Instead of recovering the loss, it's dropped further since that January 30 report.

After the end-of-the-year report, one Wall Street analyst, Eric Sheridan at UBS Securities, downgraded his estimate on Amazon from buy to neutral. After the first quarter report, a dozen analysts downgraded the company.

"Until this week's earnings report, they were overwhelmingly positive about the company, with 35 of 44 analysts rating the stock a strong buy or buy. Until this week, downgrading Amazon -- no matter what its valuation -- hasn't been a path to popularity," wrote Stewart.

The Amazon Web Services portion of the business is estimated to amount to $3 billion of the $3.2 billion in revenues listed as "other" for 2013. That portion of the business is growing strong and is expected to continue to grow, given Amazon's lead in the public cloud market. At the same, AWS revenues, already a small portion of Amazon.com's $24 billion total, may not show much growth at all, since Google kicked in 30% to 40% price reductions last March across several basic services, and Microsoft soon followed suit. AWS, as the self-proclaimed price leader, had to better or match those reductions.

On the other side of the coin, Amazon's $20 price increase for two-day delivery customers, its Prime constituency, hasn't driven customers away, at least not at a faster rate than it is acquiring new ones. The total Prime customer base is growing once again, reported CFO Tom Szkutak. With the price moving to $99 a year, that's one boost to revenues.

Chairman and CEO Jeff Bezos in the earnings announcement preferred to talk about all the new offerings and services being built out by Amazon. It's entered a multi-year licensing agreement with HBO for popular television series content, like The Sopranos, Deadwood, and Six Feet Under. Amazon also is testing its own same-day delivery service and creating a Prime Pantry grocery order service where customers may fill a 45-pound box and get it delivered for a flat fee of $5.99.

Instead of addressing the issue of profits, he seemed to borrow a page from the late Steve Jobs in describing how a new product was flying off the shelves. "Our device team launched Fire TV, offering great content, including our recently announced exclusive deal with HBO" through a device that plugs into a high-definition digital TV screen. "The team is working hard to keep Fire TV in stock," he added.

That will probably satisfy tried and true investors in Amazon, whose faith seems to defy the rules of gravity and to assume that Amazon profits are just out of sight over the horizon -- again. The continued stock drop, on the other hand, suggests that capital to finance expansion is getting harder to come by, and that at some point Amazon retail and Amazon cloud may have to play by rules that govern less lucky competitors, such as Microsoft and Rackspace. There's always cash-rich Google, who with price cuts in cloud services like its last one could take AWS's price-leader mantle away for longer than a few days.

Could the growing movement toward open source hardware rewrite the rules for computer and networking hardware the way Linux, Apache, and Android have for software? Also in the Open Source Hardware issue of InformationWeek: Mark Hurd explains his "once-in-a-career opportunity" at Oracle.

Charles Babcock is an editor-at-large for InformationWeek, having joined the publication in 2003. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive Week. He is a graduate of Syracuse ... View Full Bio

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
Page 1 / 2   >   >>
Charlie Babcock
50%
50%
Charlie Babcock,
User Rank: Author
4/28/2014 | 8:46:55 PM
Online retailing, on the ground delivery
Building out a decentralizewd, earth-bound material distribution system, versus building out online retail and cloud systems -- they represent different types of business management in the extreme. The distrubtion center, overnight delivery system and same day delivery in the big, green "Fresh" vans that I see on San Francisco streets, all of this has to be built up in a highly efficient manner by a company that's just gaining experience in the field. I don't know of another company that's trying to be both kinds of businesses. Amazon is trying to construct both for operation far into the future.
jagibbons
50%
50%
jagibbons,
User Rank: Ninja
4/28/2014 | 8:43:33 PM
Re: Drones
Shareholder value can't be sustained over time if a company can't generate profit margin. Razor thin margins may seriously threaten Amazon's future.
Somedude8
50%
50%
Somedude8,
User Rank: Ninja
4/28/2014 | 3:43:07 PM
Re: Those shareholder
Definitely have an eye on Dell, mostly out of curiousity. And a friend is one of their architects, so its interesting to hear some of the in-the-trenches stories as things both change and stay the same over there.
Lorna Garey
50%
50%
Lorna Garey,
User Rank: Author
4/28/2014 | 3:39:50 PM
Re: Those shareholder
SomeDude, I'm with you. I don't think the overall model is the problem, necessarily, as much as the current expectation that companies will consistently deliver double-digit margins. I wonder how Dell is doing ...
Drew Conry-Murray
50%
50%
Drew Conry-Murray,
User Rank: Ninja
4/28/2014 | 3:33:23 PM
Re: Drones
The purpose of a publicly traded company is to increase shareholder value. Personally I think $300 a share is a ridiculous price, but if I had bought it at $100 or even $200 a share, I'd be feeling just fine.
Thomas Claburn
50%
50%
Thomas Claburn,
User Rank: Author
4/28/2014 | 3:14:31 PM
Re: Don't Expect A Profit
I'd love to know whether Amazon is making any money on Amazon Fresh? Their delivery trucks are all over San Francisco, blocking traffic all too often. But Amazon avoid the fate of WebVan when it comes to the delivery business?
Somedude8
50%
50%
Somedude8,
User Rank: Ninja
4/28/2014 | 1:21:07 PM
Those shareholder
The more I see over the years, the more I can't escape this deep gut feeling that there is something fundamentally broken with the entire publicy traded company implementation, and maybe even the concept.

How many times have we seen shareholders, clamoring for profits, drive businesses to take actions counter to the actions that made them succssful in the first place? There is certain cycle that many companies seem to fall in to, that ultimately leads them a shareholder and spreadsheet jockey-driven demise.

Maybe I am just having a cynical morning.
RobPreston
50%
50%
RobPreston,
User Rank: Author
4/28/2014 | 12:59:12 PM
Honeymoon
If Amazon's honeymoon is over, we should all be so lucky to have one that lasts so long. But people were saying its honeymoon was over after the dotcom bust of the early 2000s.
Gary_EL
50%
50%
Gary_EL,
User Rank: Ninja
4/28/2014 | 12:39:49 PM
Drones
Ultimately, the purpose of any publicly traded company is to generate profits, which Amazon is not doing. The company's investors have been remarkably patient and tolerant. Maybe the silliness about drones was the straw that broke the camel's back.
Drew Conry-Murray
50%
50%
Drew Conry-Murray,
User Rank: Ninja
4/28/2014 | 12:36:41 PM
Don't Expect A Profit
Amazon's whole business is based on razor-thin margins in everything it sells, so it's hard to see how you can expect much profit from a company like that. I think the real danger for Amazon is if it stops growing.
Page 1 / 2   >   >>
Multicloud Infrastructure & Application Management
Multicloud Infrastructure & Application Management
Enterprise cloud adoption has evolved to the point where hybrid public/private cloud designs and use of multiple providers is common. Who among us has mastered provisioning resources in different clouds; allocating the right resources to each application; assigning applications to the "best" cloud provider based on performance or reliability requirements.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest, Dec. 9, 2014
Apps will make or break the tablet as a work device, but don't shortchange critical factors related to hardware, security, peripherals, and integration.
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
Join us for a roundup of the top stories on InformationWeek.com for the week of December 7, 2014. Be here for the show and for the incredible Friday Afternoon Conversation that runs beside the program!
Sponsored Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.