UPDATED 16:45 EDT / FEBRUARY 02 2017

CLOUD

Cloud lifts Amazon profits again, but investors wanted faster growth

Once again, the cloud kept Amazon.com Inc.’s profits flying high during the holidays, but its shares fell on lower-than-expected revenues.

The Seattle-based online retailer and cloud computing giant said it earned a fourth-quarter profit of $749 million, or $1.54 a share. That was 54 percent higher than a year ago and considerably over the $1.36 a share analysts polled by Bloomberg had expected.

Sales rose 22 percent from a year ago, to $43.7 billion, but that was a billion dollars short of Wall Street forecasts. As a result, Amazon’s shares were falling over 4 percent in after-hours trading after rising a little less than 1 percent, to $839.95 a share, in regular trading today.

Amazon Web Services, which provides online computing and storage services to many companies from small startups to Netflix Inc. and Comcast Corp., saw revenues rise 47 percent, to $3.54 billion. That was actually a little under the $3.61 billion analysts had expected, which might be partly responsible for investors’ disappointment. But cloud operating income rose 60 percent, to $926 million.

AWS has accounted for all the company’s profits in recent quarters, as Chief Executive Jeff Bezos continues to run the retail side of the business at slight loss or a small profit in favor of driving higher growth. AWS constitutes only 8 percent of Amazon’s overall revenues, but its operating profits this quarter were close to triple those of the retail side. So any sign of less-than-stellar cloud growth may result in an outsized impact on profits.

Still, even if AWS revenues came in short in the fourth quarter, Amazon overall still managed to outdo profit forecasts. The retail side of the business earned an operating profit of $329 million, with U.S. operations earning $816 million and international operations losing $487 million.

“AWS growth looks pretty healthy still,” Jan Dawson of Jackdaw Research told SiliconANGLE. “The percentages are coming down because the underlying numbers are getting so big, but the year-on-year dollar growth was similar to or higher than in the past.”

AWS faces plenty of cloud competitors now fully engaged in chipping away at its huge lead. They include Microsoft Corp., Google Inc., IBM Corp. and Oracle Corp., as well as software-as-a-service companies such as Salesforce.com Inc. This week, in fact, Google inked a five-year, $2 billion cloud deal with Snap Inc., the soon-to-go-public firm revealed in its filing with the Securities & Exchange Commission.

But according to Synergy Research, Amazon still owns 45 percent of the cloud infrastructure market, more than double the market share of the next three combined. It has continued to add features and services at a furious rate, with 308 “significant” new ones in the fourth quarter for a total of 1,017 last year.

Another disappointment for investors was likely Amazon’s first-quarter outlook. For the current quarter that ends in March, Amazon said sales will be between $33.25 billion and $35.75 billion, translating to growth between 14% and 23% from a year ago. That guidance includes an anticipated unfavorable impact of about $730 million from foreign exchange rates.

But the main miss on the outlook was profits. Amazon forecast operating income between $250 million and $900 million, compared with $1.1 billion in the first quarter of 2016. Analysts were forecasting $1.34 billion, according to FactSet. In a conference call with analysts, Chief Financial Officer Brian Olsavsky said the main factors were higher spending on fulfillment centers and digital video content and marketing.

In prepared comments, Bezos focused on customer uptake of various Prime initiatives, including free shipping, video and other services for $99 a year. Prime has become increasingly important to Amazon because members spend much more than other Amazon customers.

Photo by Robert Hof

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