E-commerce juggernaut Amazon.com, Inc. (AMZN 4.44%) reported financial results that exceeded even its own lofty expectations, and the stock is soaring as a result.
Amazon reported net sales of $43.7 billion, up 34% over the prior-year quarter, and beating the high end of its estimates. Excluding the $1.3 billion contributed by Whole Foods and the favorable impact of foreign currency fluctuations, net sales increased by 29%, still exceeding the high end of its forecast.
The bigger revelation was operating income. Amazon had forecast results in a range from a $400 million loss to a $300 million profit, but it produced an operating profit of $347 million, which surprised investors.
Here are three takeaways that help explain the compelling results.
1. AWS continues to drive profits
Amazon Web Services (AWS) continues to account for all the company's profit. For its just-completed quarter, the cloud-computing operation produced revenue of $4.58 billion, up 42% year over year, and the highest level in its history. Operating income for AWS of $1.17 billion increased 36% year over year. At the same time, Amazon's e-commerce operations generated an operating loss of $824 million.
Amazon continues to be the "dominant market leader" with the "deepest capabilities," according to a report from Gartner.
2. Prime is big and getting bigger
Amazon had its third annual Prime Day in July, and the company reported that it was the single biggest shopping day in the company's history. Amazon said the "event grew by more than 60% over last year," with sales that surpassed both Black Friday and Cyber Monday, typically two of the biggest shopping days of the year. That led to more new Prime members than ever before, and it helped Amazon increase product sales to $28.7 billion for the quarter, a 29% year-over-year increase.
On the earnings conference call, CFO Brian Olsavsky said, "I wouldn't point to anything other than the Prime Day pickup, but stronger than -- it was stronger than probably I anticipated."
Amazon doesn't report the number of subscribers to its loyalty program, but Consumer Intelligence Research Partners estimates that Prime has hit 90 million U.S. members. The company also reports that Prime members spend on average about $1,300 per year, compared with $700 per year for non-member customers.
With a record number of Prime members joining, this was a big contributor to the jump in sales.
3. Amazon can boost earnings anytime it wants
Thinking all the way back to last quarter's financial release, you may recall that some found the results disappointing. While Amazon's revenue exceeded the top end of its own guidance, income didn't come anywhere close. The company had forecast operating income between $425 million and $1.075 billion, while the reality of $197 million didn't sit well with some investors.
Amazon explained at the time that it had made a number of strategic investments during the quarter, working to increase its fulfillment capacity and logistics. The company was experiencing increases in its Fulfillment by Amazon (FBA) program, whereby third-party products are stored in Amazon's warehouses, making them eligible for Prime two-day shipping. Investments were needed to increase capacity in the second half of this year, so Amazon dialed back profits for the sake of long-term growth.
For the just-completed third quarter, Amazon forecast operating results to come in between a $400 million loss and a $300 million profit. As mentioned, the company reported operating income of $347 million, significantly higher than its forecast.
What this reveals is that anytime Amazon wants, it can scale back investment in the business to produce or improve profitability. As an investor, I'm happy to see that the company continues to take the long view, investing in its international expansion, increasing fulfillment and logistics capabilities, and funding other ongoing initiatives.
Not any one thing
Amazon continues to fire on all cylinders, and it isn't any one thing that's driving these results. The company continues to execute on all the metrics that count, and I believe it will continue to reward shareholders for years to come.