Amazon.com (NASDAQ:AMZN) may never stop investing for growth. Its razor-thin profit margin and roller-coaster earnings results are due to its continually going through new investment cycles.
Today, Amazon has more investment opportunities than ever before. On top of running its giant e-commerce business, it also owns the largest public cloud computing service in the world. It dove deeper into groceries last year with the acquisition of Whole Foods Market, and its video streaming service isn't just a part of Prime anymore.
With a hand in so many markets, Amazon needs to be clear about its priorities. Thankfully, management noted some important areas of investment for 2018 with its fourth-quarter earnings release.
Doubling down on Alexa
There's a long list of companies that want Alexa on their devices. From automakers to toilet-makers (because why not?), there's no shortage of devices featuring the voice-assistant technology. "Our 2017 projections for Alexa were very optimistic, and we far exceeded them," CEO Jeff Bezos wrote in Amazon's fourth-quarter earnings release. "We don't see positive surprises of this magnitude very often -- expect us to double down."
Amazon already dominates the smart-speaker market. And the number of device makers offering integration with Amazon's voice assistant continues to grow. Amazon counts over 4,000 smart-home devices Alexa can control. That creates an ecosystem that encourages current Alexa device owners to keep buying Alexa devices. Seventy-five percent of Amazon Echo owners said they'd buy another Alexa-enabled smart speaker as their next smart-speaker purchase, according to a survey from Strategy Analytics.
Alexa provides yet another touchpoint for Amazon in its customers' lives. Building out additional functionality and improving the voice shopping capabilities will help Amazon capitalize on its early success.
Delivering on groceries
With the acquisition of Whole Foods, Amazon is now firmly planted in the grocery market. That said, Amazon still has a lot of work to do.
2018 will see Amazon integrate Prime with Whole Foods by making it the customer rewards program. The overlap between Prime and Whole Foods customers is fairly high, but making Prime the customer rewards program could create greater customer loyalty at Whole Foods just as it's done for Amazon.com.
On the Amazon side of thing, CFO Brian Olsavsky says the company expects to invest more in AmazonFresh -- its grocery delivery service. Whole Foods should help Amazon scale its business by increasing its buying power for groceries and providing distribution centers for local deliveries. That said, Whole Foods currently has contract with Instacart for delivery through 2020, which will make it more difficult for Amazon to fully take advantage of AmazonFresh until the next decade. But it's worth laying the groundwork now, to hit the pavement running when Amazon can integrate its own delivery service with Whole Foods, and there's always the possibility that Amazon breaks the contract early.
Amazon doubled its video content budget last year, and it's not slowing down this year. Olsavsky noted that video continues to see strong engagement, and management expects additional video content will produce similar results to what Amazon has seen in the past. That is, Prime subscribers that watch video renew their memberships at higher rates and convert better from free trials.
Management has even found Prime members that watch video spend more than average. As Prime expands internationally, the role of video content becomes even greater. Amazon can benefit the most from producing original content and retaining the global streaming rights similar to what Netflix (NASDAQ:NFLX) has done following its global expansion.
Amazon spent an estimated $4.5 billion on video content last year. That's still well short of the $7.5 billion to $8 billion Netflix expects to spend on content this year, but it's quickly closing the gap. Of course, Amazon doesn't need to compete with Netflix for viewership, as Amazon Video is more of a complement to Netflix rather than a replacement.
Amazon Web Services isn't slowing down
After 10 straight quarters of slowing AWS revenue growth, Amazon reversed the trend in the fourth quarter with 44% year-over-year FX-neutral sales growth. That's up from 42% the prior two quarters. Olsavsky said the re-acceleration is partially due to lapping pricing changes from last year, but generally caused by an increase in usage.
As such, Amazon will continue investing in infrastructure as well as sales and technical teams to support its cloud business.
Investment in AWS also supports Amazon's investments in video and Alexa. Amazon uses the same infrastructure as AWS to support video streaming, so as streaming hours grow, Amazon's internal demand for AWS grows as well. The growing use of Alexa produces similar demand. So investing in AWS is like investing in the backbone of Amazon's growth.
Expanding advertising tools
Amazon's advertising business had a major impact on Amazon's profits in the fourth quarter. The small part of Amazon's business produces relatively high margins, so Amazon is going to invest in growing the segment. "We're going to keep building more and new tools based on what we're learning from our customers," Director of Investor Relations Dave Fildes told analysts on the fourth-quarter earnings call.
Amazon's advertising is mostly limited to its own ad inventory, with a small part of the business displaying ads on third-party publishers' websites. Amazon continues to grow its inventory through increased traffic to its websites and sales of its devices, but it may start investing in its off-site advertisements this year. The market presents a multibillion-dollar revenue opportunity with extremely high margins compared with Amazon's core business.
Amazon seems to be perpetually in investment mode. As long as it continues to make top-line gains, investors should be happy with the results. Amazon is already starting to show the fruits of its investments in cloud computing and advertising. Continued investment in video should produce more Prime customers, and investments in Alexa and grocery should produce more sales from those customers.
If you were expecting Amazon to step off the gas in 2018 and focus on profits, think again. Those days still seem a long way away.