July 26, 2018 / 9:16 PM / 5 months ago

Breakingviews - Amazon's growth is leaving the shop behind

Amazon President, Chairman and CEO Jeff Bezos speaks at the Business Insider's "Ignition Future of Digital" conference in New York City December 2, 2014. REUTERS/Mike Segar

NEW YORK (Reuters Breakingviews) - Amazon’s growth is leaving the shop behind. Jeff Bezos’s outfit now gets just over half its revenue from its online stores, down from two-thirds two years ago. E-commerce is still growing at a healthy clip, but the businesses Amazon has built around it are expanding far faster and producing much more profit. That makes its valuation a little less crazy.

The Seattle-based giant had another astonishing quarter, with revenue of $52.9 billion. That’s an increase of 39 percent from the same period a year ago. The company’s net margin was higher than expected, at it churned out $2.5 billion in income. And once again, the firm poured money into expanding areas such as grocery delivery in new cities, developing machine-learning tools for customers, and new video shows.

Amazon rang up over $27 billion of sales in its online stores. That’s an impressive figure, but it grew only 14 percent from the same period last year, indicating that the company’s best opportunities lie elsewhere.

The first consists of selling the expertise and infrastructure it has built to others. Revenue from allowing other merchants to flog their goods on Amazon’s website, processing and shipping their orders grew 39 percent year-on-year, and now represents around 18 percent of the group’s total. Renting out software and server space to other businesses is even more lucrative. Amazon Web Services revenue grew 49 percent to $6.1 billion – and that business provided over half of total operating profit.

The second growth opportunity lies in businesses built atop Amazon’s retailing operation. The website has become a popular destination for people looking for information about products, fueling advertising potential. The company is cagey about this but ads are the primary ingredient in its “other” revenue line, which more than doubled year-over-year. Subscriptions, which includes Prime membership for subsidized shipping, grew at the modestly less dizzying pace of 57 percent.

With shares trading at more than 100 times estimated earnings over the next 12 months, Amazon is not priced for disappointment. The stock, jolted by Facebook’s plunge, fell 3 percent on Thursday before recouping virtually all of that ground in after-hours trading. The company’s rapid expansion in profitable new areas should help calm investors’ nerves.

Breakingviews

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