Third Quarter For Amazon And The Longer Run
Summary
- Amazon.com did not have such a good third quarter because of spending to speed up delivery of retail sales, as it attempted to focus on longer-term customer satisfaction.
- Jeff Bezos, if anything, is not an executive that thinks just about the short-run, and this move on delivery times to customers has long-run implications all over it.
- Mr. Bezos has a history of delivering over the longer-run and one needs to give him the benefit-of-the-doubt in this case and support his decision.
It is ironic that I am writing this report on the third quarter earnings of Amazon.com, Inc. (NASDAQ:AMZN) the day after I posted an article on "Maximizing Shareholder Value - The Infinite Game."
Amazon's third quarter earnings dropped from a year ago.
The drop was substantial: 26 percent.
The reason for the decline: Amazon's heavy investment to reduce shipping times for retail customers.
But, Jeff Bezos, CEO of Amazon, was not thinking about the short term, as he was quoted in the Financial Times:
It's the right long-term decision for customers…"
The decision was part of a "ramping up to make our 25th holiday season the best ever for Prime customers."
And, customers have already begun to respond. Karen Weise reports in the New York Times:
In the latest quarter, unit sales were up 22 percent, more than twice the growth rate at the start of the year, before the one-day shipping initiative began."
Now, we're back to the old Amazon…." - Jefferies analyst Brent Thill.
Mr. Thill goes on:
Investors were beginning to get used to the new Amazon of getting better bottom-line upside…"
The Old Amazon, "is bottom-line downside but big investments. For short-term investors, it's a bummer, but, for long-term investors, they realize that with Amazon, these investments usually pay off."
Dan Gallager, in the Wall Street Journal, agrees. "Amazon admittedly has a long history of successfully investing for growth."
But for the short-term investors… the price of Amazon shares fell by 7 percent in after-hours trading.
The behavior of Jeff Bezos and Amazon.com represents a clear example of what focusing on a longer-term horizon can do for companies.
As stated above, focusing upon the longer-run has been a trait of Mr. Bezos and the "Old" Amazon since its beginning.
No one has been more blatant over time about choosing a longer-term focus for his business. Early on, investors worried constantly about when Amazon was going to post some profits.
As Mr. Thill states, the "Old" Amazon gave investors a lot of "bottom-line downside." It has only been in recent years that the "New" Amazon provided investors with "better bottom-line upside."
But, look at the result. The value of Amazon.com is at the top of the list, and I believe will remain there, even with a short-term correction for those investors that have a narrow horizon for their investment strategy.
Not, too shabby.
So, the management cost of changing the shipping times for retail customers took over the top line in the press, and rightfully so, because one needs to understand what is going on at Amazon and how this effort to dominate the market even more through delivery services plays into the longer-term vision of the company.
But, there were other things to talk about.
For example, Amazon Web Services, Amazon's cloud storage business, accounted for more than 70 percent of the company's total profits, even though it only represents 13 percent of total revenue.
Furthermore, the increase in sales recorded by this unit was up by almost 35 percent from one year ago.
And, although this rate of increase was lower than that achieved in the second quarter and lower than average for recent periods, there seems to be little concern about Amazon's role in the cloud space.
Financial chief Brian Olsavsky indicated that the company was also investing heavily in this area and the company is really waiting to see where the annual growth rate really levels off to after its initial burst of growth.
One other factor playing in this space is Microsoft, Corp. (MSFT), the chief rival in the cloud business, has come along fast and reported a record quarter for its cloud-services unit.
Finally, one further note about long-term corporate thinking. As I discuss in two recent posts, here and here, executives that tend to have a longer-term focus in their decision-making also make decisions that have positive effects elsewhere, as in the company's impact of climate.
Here, according to Mr. Bezos, part of the reasoning to lower shipping cost was the impact the decision would have on "Amazon's efforts to lower carbon emissions."
"Although it's counter-intuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer - it simply becomes impractical to use air or long ground routes."
So much for just short-term thinking.
Making decisions with a longer-term focus can provide greater benefits for more.
Bet on Amazon for the longer-term.
This article was written by
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Comments (27)
100% hacked website loaded with false/fake reviews, fraudulent info
In Comb Over's "sights"
More heat from "inside the beltway" (DC)Basically an attractive long term short. Disclosure: short in the 2000s, adding on any faux pops / "rally"
Furthermore cloud services is not even their SECOND largest driver of revenue growth.
Your statement:
- AWS makes up 70% of AMZN profit
- Sales in this unit were up 35% YYWhat goes unmentioned is where I would have concerns:
- AWS costs increased far faster. That led to an increase in AWS profits of only 8.9% vs the 35% revenue growth.
- Guidance indicated they were planning to continue to invest more in sales and marketing to pursue the enterprise.
- Amazon referred to their 10Q for unearned and contracted remaining purch obligations. In doing so you can see that unearned revenue was $1.6b at Sep QE and that under contract was $27.4b. Those look good until you compare to Microsoft which has $34b of unearned on BS and $86b under contract (50% of which to be recognized next 12 months).
- The previous point is the most worrisome. They are trying to gain share in the enterprise by price cutting in exchange for long term commitments. That is likely to put pressure on their AWS profits in the future.I'm certainly not betting against Amazon but this print may be followed by future reduced profits in AWS which delivers the lions share of their profit.