Big-spending Amazon surprises City

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Published: Friday 30th January 2015 by The News Editor

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Amazon has notched up a Prime fourth quarter, surprising investors with a profit that soundly beat expectations, despite a continued increase in spending and a slight sales miss, partly linked to the strong dollar.

Investors drove shares up over 11% in after-market trading.

The online retailer’s strategy always has been to spend a big chunk of the money it makes to grow and expand into new areas like cloud computing, streaming video and hardware. That has affected profitability, to investors’ some-time chagrin.

But the latest results seem to indicate that at least some areas in which Amazon has invested heavily, such as its 99-dollar (£66) annual loyalty programme and Amazon Web Services cloud computing offerings for businesses, are finally helping out its bottom line.

Chief executive Jeff Bezos said Prime membership grew 53% during the year even though it raised prices – the Seattle company does not give out total figures. Prime memberships help Amazon get people to engage more often with the company’s products – making them likely to spend more, says Morningstar analyst RJ Hottovy.

After raising Amazon’s price to 99 from 89 dollars last year, Amazon beefed up offerings, added a grocery delivery services and music streaming for Prime members. It also launched original TV shows such as the Golden Globe-winning Transparent, starring Jeffrey Tambor.

The video streaming service in particular seems to be a hit with Prime members. In a call with analysts, executives said that video content customers who sign up to its Prime service for a free trial are converting at higher rates than other ways of signing up.

“Prime is a one-of-a-kind, all-you-can-eat, physical-digital hybrid – in 2014 alone we paid billions of dollars for Prime shipping and invested 1.3 billion dollars in Prime Instant Video. We’ll continue to work hard for our Prime members,” Mr Bezos said.

Another strong point is the company’s cloud computing division, Amazon Web Services. Worldwide active members exceeded one million during the quarter.

“Amazon is gaining some pricing strength in its Amazon Web Services unit after being forced to lower prices in the first half of 2014,” said Daniel Morgan, a Synovus Trust portfolio manager who invests in Amazon.

“Amazon Web Services is a big part of the whole reason to own this stock.”

During the October to December quarter, Amazon earned 45 cents per share, easily topping Wall Street expectations. The average estimate of analysts surveyed by Zacks Investment Research was for earnings of 24 cents per share.

Amazon posted revenue of 29.33 billion dollars (£19.5bn) in the period, missing Wall Street forecasts of 29.84 billion, according to Zacks. Amazon said the strong dollar pared nearly 900 million (£600m) from revenue during the quarter.

One weak spot in the results was Amazon’s revenue forecast. For the current period ending in March, Amazon forecast revenue in the range of 20.9-22.9 billion dollars. Analysts surveyed by Zacks have forecast revenue of 23.23 billion (£15.5bn).

But investors gave that a pass. Shares rose 36.18, or 11.6%, to 347.96 dollars in after-market trading, after closing the day up 2.6% at 311.78. The stock had been up less than 1% since the beginning of the year.

Published: Friday 30th January 2015 by The News Editor

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