Amazon Dashes High Expectations…with Huge Profits?

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Amazon.com Inc. on Thursday delivered the largest quarterly profit in its 20-year history, but investors apparently are thirsty for more after subsisting on thin margins for years. The failure to meet outsize expectations underscores the pressure Amazon now faces after teasing…

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(FROM THE WALL STREET JOURNAL 1/29/16)

Amazon.com Inc. on Thursday delivered the largest quarterly profit in its 20-year history, but investors apparently are thirsty for more after subsisting on thin margins for years.

The failure to meet outsize expectations underscores the pressure Amazon now faces after teasing Wall Street in recent quarters with tighter costs and black ink. Amazon until recently put nearly every dollar it generated back into the business.

The company was one of the big growth stories among technology stocks in 2015, more than doubling its market value to over $300 billion last year and easily outperforming other tech giants like Alphabet Inc., Apple Inc. and

Inc. With its $99-a-year Prime unlimited shipping program, Amazon has become a dominant force in retail and has demonstrated it can quickly gain market share in new businesses as diverse as cloud computing and hot-food delivery.

Amazon's 22% revenue bump to $35.7 billion just missed Wall Street's estimates, marking the sixth straight year it has come up short for this period, according to Mark Mahaney, an analyst at RBC Capital Markets.

But that gain contrasts with stagnant holiday sales from its brick-and-mortar rivals as more consumers opt for the convenience of ordering goods and services from their couch. Other Web retailers are stalling, including eBay Inc., which on Wednesday failed to show revenue growth for the fourth straight quarter and warned of a tepid start to 2016.

For the year, Amazon passed $100 billion in revenue for the first time in its two-decade history. It took rival Wal- Mart Stores Inc. 35 years to reach the same mark in 1997, two years after Amazon.com opened for business.

Amazon has captured more customers by aggressively building out new warehouses near urban centers to speed deliveries and by bulking up its Prime unlimited shipping membership with streaming video and other benefits.

And it has built up a huge lead on rivals in offering cloud-computing services through its lucrative Amazon Web Services unit, which rents computing power to other companies from thousands of servers. Sales from that business jumped 69% to $2.4 billion, while operating profit nearly tripled to $687 million, reinforcing its place as Amazon's fast- rising growth engine. Still, AWS's revenue growth slowed from 78% in the previous three months as Amazon drained more costs.

Amazon has in recent months announced new AWS data centers in Ohio, China, the U.K., South Korea, Canada and India, highlighting the global ambition of the division and its widening lead on rivals Microsoft Corp. and Alphabet.

The company said nearly half of the units of merchandise it sold in the quarter came from third-party sellers who store their goods in Amazon warehouses. That is good news for Amazon because most observers assume such sales are generally more profitable than the merchandise it purchases itself for resale.

Chief Financial Officer Brian Olsavsky declined in a call with reporters to discuss margin on third-party goods, but said such sellers help bulk up Amazon's overall inventory.

Shipping is one of Amazon's biggest weapons but also its crux as Amazon asserts itself over brick-and-mortar rivals that in most of the country remain the choice for instant-shopping gratification.

Amazon is rolling out one-hour and same-day delivery in a growing number of cities, not to mention plans for 30-minute delivery by drone, projects that may take years to show a profit.

As a result, expenses continue to rise. The company's operating costs climbed 20.5% to $34.6 billion from $28.7 billion a year earlier.

In the quarter, shipping costs jumped 37% to $4.17 billion. As a percentage of sales, shipping costs rose to 12.5% from 10.9% in the year-earlier period, suggesting the company relied more heavily on pricey third-party couriers to help dispatch goods during the holidays, Mr. Mahaney said.

"We've found we needed to serve our customers at peak; we needed more of our own logistics to supplement partners," said Mr. Olsavsky in a call with analysts. "Those carriers are just no longer able to handle all of our capacity that we need at peak."

  (END) Dow Jones Newswires
  01-29-160247ET
  Copyright (c) 2016 Dow Jones & Company, Inc.

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