"There are two kinds of companies: those that work to try to charge more, and those that work to charge less. We will be the second."
-- Jeff Bezos. Amazon CEO
Amazon.com (AMZN 1.64%) has long worked to offer customers the lowest prices it can, operating at breakeven margins for much of its history and making value the core of its business model. That approach and its benefits have rarely been more apparent than in the company's fourth-quarter earnings report, out Thursday night. The stock jumped more than 10% in pre-market trading Friday morning as the tech giant beat estimates on both revenue and earnings. Here are the big numbers:
- Overall revenue rose 21% to $87.4 billion, ahead of expectations at $86 billion.
- On the bottom line, EPS rose from $6.04 to $6.47, crushing estimates at $4.03.
Analysts had widely expected Amazon's profits to fall due to its rollout of one-day Prime shipping. However, although Amazon's operating profits in North America fell, the decline was less than expected, and the company made up for it with continued growth in its cloud computing division, Amazon Web Services (AWS). Once again, the gambit of lowering prices for customers and stuffing Prime with more benefits paid off, delivering better results than expected.
Image source: Amazon.
The power of Prime
There's no question that Amazon Prime is one of the biggest competitive advantages in retail, and Amazon continues to invest in it to make it stronger. Not only has it rolled out one-day free shipping on millions of items, but it's also made grocery delivery free from Whole Foods and Amazon Fresh (which previously cost $15 a month) in more than 2,000 U.S. cities and towns.
Amazon has now reached 150 million Prime members globally, just 21 months after it eclipsed 100 million memberships, showing that sign-ups for its core loyalty program appear to be accelerating. Benefits like free one-day shipping and free grocery delivery have likely helped drive that growth.
In the fourth-quarter report, the company also said that in Brazil, where Prime was launched in September, it has seen the fastest growth in Prime in Amazon's history. Amazon also noted that viewing for Prime original movies and TV shows doubled in the quarter, showing other ways that the service is adding value for subscribers.
North America sales rose 22%, significantly better than the 18% the company saw a year ago, helped by results of free one-day shipping. Similarly, paid units sold rose 22% globally, up from 14% a year ago, showing how faster shipping grows customer orders.
Don't forget about AWS
While Amazon's e-commerce division gets the bulk of the attention, AWS has actually become its biggest profit generator and fastest growing segment. In the past decade, the service has lowered prices more than 70 times, and in the fourth quarter the company lowered prices by up to 40% on a set of virtual servers and improved performance at the same time. It also introduced a new intermediate tier of storage, dubbed UltraWarm, that reduces cost by as much as 80% compared to previous options.
Amazon is investing in AWS on multiple fronts, including machine-learning tools, artificial intelligence, data analysis, and storage capacity, among others. Though those investments ate into the segment's profit margin in the period, lowering it from 29.3% to 26.1%, investors trust that those initiatives will pay off down the road.
A winning strategy
After decades of promising to invest for the long term, Amazon has earned the market's trust to spend on programs like one-day Prime shipping that lead to further growth. The fourth quarter was yet another example of the huge payoff Amazon reaps when it executes that strategy.
Though operating profits fell in North America, revenue growth accelerated, and Prime membership is surging as subscription revenue was up 32% in the quarter. Investors know that growth in its core loyalty program will pay off, and that it makes its competitive advantages stronger. By proving that again, Amazon stock deserves this earnings pop.
