Amazon's profitability creeps toward software
SAN FRANCISCO — With the quarterly results Amazon reported late Thursday, CEO Jeff Bezos and the rest of the Seattle-based giant showed the world they've pioneered an Internet software business that’s not only fast-growing but profitable too.
That cloud computing service, called Amazon Web Services, saw year-over-year sales growth accelerate to 81% in the second quarter, while its operating profit surged five-fold, to $391 million.
Amazon’s cloud software products sold so well and so profitably to businesses in the second quarter that they, along with cost discipline that was unusual for the company, helped push its operations into the black.
An overall operating margin of 2% of revenue and a swing to a net profit from a year-earlier loss was enough to make Amazon investors ecstatic.
As they have all year, they bought the stock with two fists.
These are the same growth investors who’ve bid up Amazon shares for more than a decade — even though the company’s operating margins were consistently close to Walmart’s.
These buy-and-hold (and buy more) shareholders have put up with low-single-digit margins (occasionally mixed with operating losses) from Amazon for years.
Yet they've kept buying the stock as long as the company delivered more sales growth.
Amazon has, and since U.S. tech stocks bottomed after the dot-com crash and terrorist attacks of late 2001, its shares have climbed more than 3,600%.
During that same time, the Nasdaq Composite Index is up a modest 140% and software competitor and Redmond, Wash.-based rival Microsoft has gained a paltry 35%.
While former Microsoft CEO Steve Ballmer was acquiring Skype and Nokia and defending the Windows monopoly, Bezos was investing full bore in Internet server farms and software systems to tie them together.
Faith and patience have paid off for Amazon and its investors, as the company now has a product that looks very little like a video download or discounted TV.
With an operating margin of 21% of revenue, Amazon Web Services looks more like an enterprise software product delivered via the cloud.
While it’s still a small piece of Amazon’s overall revenue, at 8% of the total, a fast-growing and profitable cloud software business can finance a lot more vans and drones to deliver even more retail products.
If Bezos finds that investment opportunity too tempting, Amazon's wider-than-a-razor margins may prove short-lived.
Still, if you’re an investor in technology stocks this week, you may want to tilt your hat — and maybe your portfolio — toward the company formerly known as Amazon.com.
On the other hand, if you own shares of Microsoft, Oracle, SAP or another enterprise-software maker, it’s worth asking what’s going to happen to their respective operating margins — historically much fatter than Amazon’s — as the shift to the cloud accelerates.
Amazon just reported strong proof this long-predicted technology shift is accelerating, and that the company is well-positioned to profit from it.
Follow Paste BN columnist John Shinal: @johnshinal