Amazon’s quarterly profit nears US$2 billion

Amazon’s quarterly profit reached a record US$1.86 billion in the three months to December 31, fuelled by millions of new customers to its Prime fast-shipping club.

There was also a provisional $789 million boost to its bottom line from the US government’s tax bill which was passed in December.

“This was another blow-out quarter for Amazon,” said GBH Insights analyst Daniel Ives. “The retail strength was eye-popping as the company had a banner holiday season and looked to capture roughly 50 per cent of all e-commerce holiday season sales.”

“Our 2017 projections for Alexa were very optimistic, and we far exceeded them,” said founder and CEO Jeff Bezos.

Neil Saunders, MD of GlobalData Retail, said that with 38.2 per cent sales growth in the final quarter, Amazon was one of the clear winners over the holiday season.

“Admittedly this number is flattered by the inclusion of Whole Foods revenue, but even when this is stripped out, Amazon still increased sales by an impressive 27.9 per cent. Given this is above the trajectory of recent growth, it is safe to say that Amazon shows no signs of slowing down.”

Saunders said the figures clearly show Amazon’s primary growth opportunities now lie in services.

“Prime and subscription revenue, for example, increased by 46 per cent over the prior year. This is an impressive uplift and demonstrates Amazon is pulling more and more consumers into its ecosystem of content and services.”

Allied with the increase in Prime membership is the rise in sales of Echo devices.

“Our data show these were popular gifting and self-purchase items over the holiday period. Amazon now has a clear edge over other smart device manufacturers. This, and the fact Prime offers far more benefits and services than rivals, means Amazon should be able to withstand increasing competition from Apple, Google, and others as they launch and upgrade their smart speakers and connected home products

Growth from services, as well as the addition of Whole Foods, is helping to strengthen Amazon’s bottom line. This quarter, net income increased by a stellar 147.8 per cent while operating profit rose by a very respectable 69.5 per cent.

“This is in spite of increased investment and higher losses from the international operation. Notably, the better profit outcome also masks the pressure on margins from increased delivery and fulfillment costs: these rose by 56.9 per cent over the prior year and as a proportion of product sales rose to 21.7 per cent from 18.7 per cent in the same period last year.

“Although Prime revenue offsets some of the fulfillment costs, this income is also used to fund content production, and various other benefits members enjoy. As such, we believe Prime makes only a small contribution to covering Amazon’s fulfillment costs. However, over the longer term, we believe this contribution may increase as Amazon starts to raise the price of membership.”

Saunders said that while Amazon has grown sharply, it is still nowhere near its potential. “There are categories, like home and apparel, where it is underpenetrated and with tweaks to its proposition should be able to make further gains. There are markets around the world, like Australia, where Amazon is just getting started and has significant scope to boost sales. There are areas, like healthcare, that it is seeking to disrupt in the future. And there is Whole Foods, where some progress has been made – but which has yet to feel the full force of Amazon’s innovative approach.

“In other words, Amazon has a lot more runway to grow.”

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