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Amazon’s Jeff Bezos Steps Up Spending Again To Chase Growth

Published on Jan 30 2016 5:05 PM in Technology tagged: Amazon / Technology / Jeff Bezos

Amazon’s Jeff Bezos Steps Up Spending Again To Chase Growth Inc. just reminded everyone it’s perennially in investment mode.

While fourth-quarter net income more than doubled to a record $482 million, or $1 a share, it was much less than what analysts’ had projected and Amazon’s shares plummeted as much as 15 per cent after the the web retailer reported results Thursday for the busy holiday quarter.

After delighting investors with a surprise profit in the middle of 2015, chief executive officer Jeff Bezos has decided to boost spending again, betting that speedier shipping, intelligent home gadgets and web technology and services will deliver robust sales growth down the road. He isn’t shy about spending money: Amazon ramped up same-day deliveries in the latest period, driving up fulfilment costs by 33 per cent; the company will also air its first-ever Super Bowl ad next week. All this is line with Bezos’s argument that Amazon is still in the early stages of growth: "It feels every bit like Day 1," he said in the earnings statement.

"I’ve been following Amazon for a very long time and I’ve seen people doubt this stock before," said Victor Anthony, an analyst at Axiom Capital Management. "They are investing to get closer to the customer and continue to take meaningful share of retail. Investors who stick with the stock will continue to be rewarded as they have been in the past five years."

While revenue rose 22 per cent to $35.7 billion in the fourth quarter, the stronger dollar subtracted $1.2 billion, pushing it below analysts’ average projection for $35.9 billion. Net income fell short of analysts’ prediction for $742.9 million, or $1.55.

Amazon’s shares, which more than doubled last year, fell the most in 15 months Friday, dropping 7.6 per cent to $587 at the close in New York.

This was the first shopping season following Amazon’s Prime Day promotion in July, an effort to boost the company’s $99-a-year subscriptions that include delivery discounts and convert occasional shoppers into devotees. It was also the first season that Amazon offered same-day deliveries in most big cities around the country to cater to last-minute shoppers. eCommerce is on track to make up 9.8 percent of all U.S. retail sales in 2019, up from 7.1 per cent in 2015, according to EMarketer.

At the end of 2015, there were more than 54 million Prime members, who get two-day deliveries and access to online movies and music, according to Consumer Intelligence Research Partners. That’s an increase of 35 per cent, the researcher said, adding that the average U.S. Prime shopper spends $1,100 annually with Amazon, compared with $600 for non-members.

For the first quarter, Amazon forecast revenue of $26.5 billion to $29 billion, compared with analysts’ average estimates of $27.6 billion.

Web, Spending

One bright spot was Amazon Web Services, the cloud-computing division, which had fourth-quarter sales of $2.4 billion, up 69 per cent from a year earlier. The unit, built on Amazon’s expertise in running its web store and handing massive amounts of data and analysis, represents a fast-growing and profitable part of Amazon’s business, even though it makes up only about 7 per cent of revenue, the company said.

On the spending side, operating expenses increased 21 per cent to $34.6 billion, Amazon said. Bezos’ biggest challenge is balancing Wall Street’s thirst for profits against his own ambitions of using new technology - such as unmanned drones and intelligent household gadgets. Bezos is also eager to replicate his U.S. success abroad, including challenging Flipkart Online Services Pvt. for India’s fast-growing eCommerce industry. Spending on delivery fulfilment and technology jumped, according to Kerry Rice, an analyst at Needham and Co.

"They were well below what people were expecting on earnings because they spent more than what people were expecting," Rice said. "Amazon reached this new level of profitability in 2015 that we hadn’t seen previously. If they don’t keep that trend going in the right direction, the stock goes down."

News by Bloomberg, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.

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