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Seattle-based Inc. reported second-quarter earnings that topped analysts’ estimates. Photo: Alamy
Seattle-based Inc. reported second-quarter earnings that topped analysts’ estimates. Photo: Alamy

Amazon cloud unit helps it stay profitable while investing

Amazon Web Services delivered operating income of $718 million56% of Amazon's totalthough it accounted for only 9.5% of revenue

Seattle: Inc. is showing investors it can be consistently profitable while making big investments to challenge competitors in the US and expand around the globe.

The Seattle-based company reported second-quarter earnings that topped analysts’ estimates, while spending on quicker delivery to keep ahead of Wal-Mart Stores Inc. and other brick-and-mortar retailers, expanding its entertainment offerings to challenge video-streaming rival Netflix Inc. and pouring money into India to take on e-commerce competitor Flipkart Ltd.

It’s a new chapter for Amazon, which has previously entered money-losing cycles with big investments in pursuit of growth. The company on Thursday reported its fifth-straight profitable quarter while operating expenses rose 28% to $29.1 billion. The shares rose 2.1% in early trading Friday to $768.80.

“They are really putting the narrative that this company can’t be profitable to rest," said R.J. Hottovy, an equity analyst at Morningstar Inc.

Amazon Web Services, the company’s fast-growing and profitable cloud-computing division, provides a lot of wiggle room in other areas of the business. The unit delivered operating income of $718 million—56% of Amazon’s total—though it accounted for only 9.5% of revenue.

The extra cushion enables Amazon to increase spending elsewhere without losing money. The company will have opened 21 new fulfilment centres this year by the end of the third quarter. That’s more than double the 10 it opened in the first nine months of 2015, chief financial officer Brian Olsavsky said.

Strong demand during last year’s holiday season drove up costs for Amazon as its delivery operations were stretched to the max. The company hopes to head off a repeat this year by building additional capacity, which could improve profit margins in the critical fourth quarter.

Amazon also will double spending on digital content in the second half of the year compared with 2015, Olsavsky said. The spending will help Amazon increase its original video content, encouraging more customers to sign up for the $99 annual Prime membership to get the company’s entertainment programming and further distinguishing the video-streaming service from its competitors.

And it continues to invest in India, the world’s second-most populous country. Amazon has pledged to spend $5 billion in the country and launched its Prime programme there earlier this month with an offer of free one- and two-day shipping to stand out from Flipkart.

“We’re very encouraged by what we’ve seen in India," Olsavsky said on a call with analysts.

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