Amazon's big spending pays off in 4th quarter

AP News
|
Posted: Jan 29, 2015 6:18 PM
Amazon's big spending pays off in 4th quarter

NEW YORK (AP) — It was a Prime quarter for Amazon.

Amazon surprised investors on Thursday with a fourth-quarter 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 percent in aftermarket trading.

Amazon'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' sometime chagrin. But the latest results seem to indicate that at least some areas in which Amazon has invested heavily, such as its $99 annual loyalty program and its Amazon Web Services cloud computing offerings for businesses, are finally helping out its bottom line.

CEO Jeff Bezos said Prime membership grew 53 percent during the year even though it raised prices. (The Seattle company doesn't 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 R.J. Hottovy.

After raising Amazon's price to $99 from $89 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 in Prime Instant Video. We'll continue to work hard for our Prime members," Bezos said in a statement.

Another strong point is the company's cloud computing division, Amazon Web Services: worldwide active members exceeded 1 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. The online retailer posted revenue of $29.33 billion in the period, missing Street forecasts of $29.84 billion, according to Zacks. Amazon said the strong dollar pared nearly $900 million 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 billion to $22.9 billion. Analysts surveyed by Zacks have forecast revenue of $23.23 billion.

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