UPDATED 16:51 EDT / OCTOBER 27 2016

CLOUD

Despite surging cloud business, Amazon’s profits miss forecasts

Despite continuing strength in the cloud computing business that has buoyed profits for the past year or more, Amazon.com Inc. today reported third-quarter profits that missed analysts’ expectations.

The Seattle-based online retailer and cloud giant said it earned a profit of $252 million, or 52 cents per share. That was way above the 17 cents a share it earned a year ago, but way below the 85 cents analysts had expected. Amazon’s sales of $32.7 billion topped Wall Street forecasts slightly.

Shares were falling in after-hours trading by more than 6 percent. Investors may have been reacting to stepped-up investment on a number of fronts, such as fulfillment and data centers, digital content and newer products such as the Echo smart speaker.

For the current quarter that ends in December, Amazon said it expects revenues of between $42 billion and $45.5 billion, or growth between 17 and 27 percent. Analysts surveyed by Zacks had forecast $44.7 billion. But the company provided a surprisingly wide-ranging forecast for fourth-quarter operating profits, from zero to $1.25 billion.

Still, Amazon’s cloud computing business helped the online retailer and cloud leader post its sixth straight overall quarterly profit. Amazon Web Services, which provides online computing and storage services to many companies from small startups to Netflix Inc. and Comcast Corp., today reported a $861 million operating profit.

That’s more than double a year ago — and quite a bit more than the Amazon’s overall operating income of $575 million. That means AWS, with just 10 percent of Amazon’s overall sales, again reversed what would otherwise be an operating loss thanks to losses in the core business, especially internationally. AWS revenues rose 55 percent to $3.2 billion from $2.1 billion a year ago.

AWS faces new, hard-charging competition from the likes of Microsoft Corp., Google Inc., Oracle Corp. and IBM Corp., all of which are also targeting cloud services. Amazon has continued a rapid pace of new feature introductions. Earlier this month, AWS signed a landmark deal with data center virtualization leader VMware Inc., whose software helps companies save money on hardware by allowing them to run multiple operating systems on the same machine.

“AWS certainly faces strong competition from both Google and Microsoft, but so far it’s been able to hold its own, in part because it has the first mover advantage here for the kind of workloads it specializes in,” said Jan Dawson, chief analyst at Jackdaw Research.

Moreover, cloud computing remains a relatively small portion of overall enterprise technology spending, so there’s likely plenty of opportunity to go around. “If you looked three or four years ago, the number of enterprises running significantly on the cloud was very different,” AWS CEO Andy Jassy (above) said in a recent interview with SiliconANGLE. “Enterprises have gotten excited about operating in the public cloud to a much more dramatic extent.”

Although Amazon’s massive investments in fulfillment centers and data centers clearly give some investors pause, others view them as a positive sign. “The massive demand implied by investments in fulfillment and AWS strength give us further confidence in AMZN’s long-term prospects,” Cowen & Co. analyst John Blackledge said in a note to clients.

Photo by Seth MacMillan

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