Amazon Continues Startling Profit Growth: The Industry Reacts

Last week (26 July) Amazon (NASDAQ: AMZN) reported financial results for the quarter ending 31 June, 2018. The company’s profit smashed expectations, and the net income increased sixfold to reach USD$2.5bn (£1.9bn), resulting in a 3% increase in stock in afterhours trading.

This followed a turbulent week of tech results, with Facebook’s value crashing USD$118bn (£90bn) post results, the single biggest loss in U.S. history. As a result of Amazon’s earnings, it places them in the lead of the race with the USD$1tn (£76bn) valuation.

Highlights from the results include:

– Net income jumped more than sixfold to USD$2.5bn (£1.9bn), largely driven by the growth of Amazon’s high-margin businesses, like cloud services and advertising

– EPS (Earnings per share): USD$5.07 vs USD$2.50, as estimated, according to Thomson Reuters

– They fell short on revenue predictions. Revenue: USD$52.9bn (£40.4bn) vs USD$53.41bn (£40.8bn), as estimated, according to Thomson Reuters (30% YoY)

– Amazon stock is up roughly 2% in extended trading

– AWS revenue: USD$6bn (£4.6bn) vs USD$4.1bn (£3.1bn) last year, according to FactSet

– Sales from Prime Day have NOT been included in the second-quarter results and will instead be included in the next quarter

Customer-centric approach

Tom Rolph, VP, EMEA, Tapad says that “what has always been a highlight of Amazon’s approach is their understanding of the customer journey. Where other retailers can sometimes fall down is with their cross-device strategy. Amazon understands how people shop, whether that’s searching on a laptop and purchasing on mobile, or vice versa. The e-commerce giant shows no sign of slowing down and, from an advertising technology perspective, for retailers to be able to compete with them they have to look to fully understand the customer journey and how users behave with each device.”

Amazon’s business success comes down to efficiency

Ivan Mazour, CEO, Ometria explains that retail has a future beyond Amazon. He says: “generating USD$52.9bn in revenue, Amazon’s success comes as little surprise. The company’s innovative composition of different offerings, whose growth is underpinned by the huge profitability of its e-commerce offering and its cloud services, means that customers already using its services are likely to be tempted to expand to new areas, given the ease of the experience.

“Amazon’s ongoing play for first preference from its customers is effective and comes alongside its innovative approach to its offerings – Prime, same-day delivery, and Fresh, to name a few.

“While retailers can certainly learn a thing or two about innovative customer experience from the online giant, we don’t see a completely Amazon-shaped future for the retail sector. Amazon is undeniably great for convenience and functional shopping, but what’s clear is that today’s consumers demand personal, deep-rooted relationships with the brands they shop with, connections that go far beyond simple transactions. By ‘owning’ that customer relationship retailers can compete, but only if they work hard to create personalised experiences that their customers will love.”

Amazon Marketing Services remain vital to growth

Ruth Manielevitch, director of business development, EMEA, Taptica, focuses on the importance of Amazon’s marketing platform. She says: “Amazon’s relentless and aggressive growth means it’s on course to become the world’s first USD$1tn company; and its results for this quarter reflect its continued successes, thanks to prominent investments in Prime and acquisitions like Whole Foods and PillPack. Amazon now accounts for a third of UK e-commerce sales, but what’s interesting is its growing dominance in the online ad market. Whilst e-commerce remains its main hustle, Amazon Marketing Service (AMS) is now giving Google and Facebook a run for their money. AMS is one of the company’s main drivers of profit and contributed significantly to net income jumping more than sixfold to USD$2.5bn. With so much investment, teamed with purchase data at its fingertips, Amazon is set to become an incredibly strong player in the programmatic market. By 2020, it’s expected that Amazon will be the third most powerful advertising player in the world.”

Looking East

John Maltman, CEO, E Fundamentalsfeels that the results show that “once again, Amazon has released another set of triumphant quarterly results, reporting USD$52.9bn in revenue. Amazon has had a blockbuster year, with investments in Whole Foods paying off, as well as having expected to have earned over USD$4bn in sales during Prime Day this year. However, Google’s huge investment in Chinese e-commerce giant JD.com, was a shot across Amazon’s bow as the tech giants battle it out to dominate the e-commerce market. There is a lot to admire and learn from businesses like Alibaba and JD.com – in particular, the great customer-focused range of services and the wide network working effectively with suppliers.”  

From duopoly to triopoly

Mark Ellis, MD, SYZYGY notes that “these results indicate that the duopoly is no longer actually a duopoly, but a rapidly evolving triopoly – Amazon’s power and influence is growing inexorably.

“The sheer scope and reach of Amazon’s business is vast, able to sell you a million-pound programmatic advertising campaign, multimillion-pound cloud-based solutions, or a 20p iPhone case. It also has a mammoth stake in third-party marketplaces. High margins are partly responsible for the scale of profit expansion the company has seen; and Q2 also saw the introduction of yet more Prime member benefits, this time in Whole Food stores, growing Amazon’s relentless, yet seamless, integration into shoppers’ lives.

“But the part of this story to watch is Amazon Marketing Services (AMS). AMS and Amazon’s cloud services (Amazon Web Services) are two of the most profitable parts of the business, and they’re growing fast. AWS skyrocketed from $USD3.66bn in Q4 last year to USD$6.1bn in these latest results. Amazon has always had strong relationships with brands and marketers through AMS, but it will be interesting to see how the move towards working with them directly develops.

“Studies have shown that 56% of shoppers begin their product search on Amazon – and with the growth of Alexa and other tech investments, marketers and advertisers can safely start prioritising spend with what could well be the world’s first trillion-dollar company. The fact that Amazon Optimisation for brands has become an industry in itself, something we now do a lot of at SYZYGY, points towards Amazon’s phenomenal influence both as the world’s leading online retailer and as a snowballing media giant in its own right.

The analysts’ view

Andrew Lipsman, principal analyst, eMarketer comments that “Amazon’s powerful commerce engine keeps chugging along and is finally beginning to drop more to the bottom line. But the bigger story coming out of its earnings is the significant margin expansion being driven by the acceleration in the cloud and advertising businesses. There’s still a lot of runway for both of these higher margin businesses; and with the rest of the business continuing to fire on all cylinders, the question now is whether we’ll see Amazon hit a USD$1tn market cap sooner rather than later.”

Meanwhile, Patricia Orsini, principal analyst, eMarketer takes a closer look at Amazon’s burgeoning grocery business: “Indeed, this is still early days for the Whole Foods/Amazon merger. Because it has taken Amazon nearly a year to roll out Prime benefits to in-store, the potential for Amazon to grow its food and beverage sales is just beginning. At just 1.8% of Amazon sales, according to eMarketer, this is the final frontier for Amazon.

“As Prime members increasingly scan their mobile apps to get discounts, Amazon is collecting more data about consumers’ grocery purchase habits. This will help Amazon not only to curate product selection in-store, but it will give them better insights into what online shoppers might buy. And, as Amazon continues to develop its private label brands, expect food and beverage products to grow.”