January 31, 2019 / 9:56 PM / 6 months ago

Breakingviews - Amazon’s aggression has sustainable fuel supply

The logo of Amazon is seen at the company logistics center in Lauwin-Planque, northern France, February 20, 2017. REUTERS/Pascal Rossignol

NEW YORK (Reuters Breakingviews) - Amazon.com’s aggression has a sustainable fuel supply. The $840 billion e-commerce giant’s holiday quarter sparkled with revenue growing 20 percent. Web services and advertising are two of the biggest sources of this expansion. They’re also the most profitable – and have plenty of juice left in the tank.

Amazon’s growth may be somewhat slower than in the past, but it is remarkable to see a company this big expand at such a pace. One supporting factor is that Chief Executive Jeff Bezos has largely managed to finance the business with the significant amount of cash it generates. He has also followed up well on his belief that new markets, such as grocery delivery or online video, are worth entering.

Amazon Web Services is particularly powerful. At $7.4 billion, its top line jumped by 45 percent in the three months to the end of December. And its operating margin expanded to 28 percent. That means it accounted for more than half of Amazon’s overall $3.8 billion operating profit in the three months to the end of December.

Advertising margins may well be higher as the business sells an extra service on top of Amazon’s existing web pages. Amazon doesn’t break out its revenue, but advertising is the major component of the “other” line in earnings. That ballooned 95 percent to $3.4 billion.

Growth isn’t likely to taper significantly for these businesses for a long time. Only about 7 percent of all enterprise IT spending is currently on cloud-based services, according to KeyBanc Capital Markets. And despite so many consumers using Amazon as their default place to search for goods, the ad revenue generated by Bezos’s company pales beside that of Alphabet, which is likely to record over $30 billion worth in the fourth quarter, based on I/B/E/S/ data from Refinitiv.

Shareholders may occasionally grumble that Amazon always deploys all the capital it generates into expansion. Its twin profit engines of web services and advertising look set to generate substantially more for some time. Bezos doubtless already has plenty of ideas about how to use it.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below