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Amazon won’t magically churn out profits, and that’s okay

LiveMint logoLiveMint 28-04-2017 Shira Ovide

Investors love Amazon. But they are also perennially wrong about Amazon.

To be clear, there is a lot to love. In the first quarter, Amazon.com Inc. posted revenue growth of 23% and a surprisingly healthy—by Amazon’s standards—operating profit margin of 2.8%. The company’s forecast calls for a similar clip of sales growth in the three months ending in June, although its forecast for operating profit for the second quarter is below Wall Street expectations.

That second-quarter profit forecast was a number that analysts had pinpointed in advance as a possible miss. The stock market sensibly shrugged off that tiny complaint and focused instead on Amazon’s incredible sales increase for a company of its size and breadth. Shares rose about 4% in after-hours trading.

But let’s go back to that profit forecast. Amazon keeps acting like Amazon—a company that plows about 97 cents of every dollar in sales back into fuelling its endless ambitions. The company has more than proved it knows what it is doing, although some of its newer projects like physical bookstores and convenience stores and an expensive splurge on online video programming deserve more of an explanation to investors on how they are worth the investment.

The real problem isn’t Amazon but investors’ inflated hopes of profit inflation. The company has never generated more than $4.2 billion in annual operating profit—its total in 2016. Yet the average of analysts’ estimates is for profit to leap to $6 billion this year and nearly $10 billion in 2018. It’s not Amazon’s fault that Wall Street expects a profit bonanza, but the expectations seem out of hand. (If Amazon hits the high end of its operating income forecast for the second quarter, it will have $2.1 billion in operating income in the first half of 2017.)

Again, Amazon for now deserves the benefit of the doubt to spend how it wishes. The winds are at its back in both retail and corporate technology, where its Amazon Web Services division pulled in $13 billion in high-margin revenue in the last 12 months. And Amazon helps itself by being supremely capable of erecting sails to speed its advance.

There remains plenty of room to grow. Amazon is perhaps a few percentage points of all retail spending in the US, and it will gain disproportionately as more of that shopping moves online. If you believe that trend is inevitable—and you should—and you believe Amazon has done almost everything right in running its business—and you should—and you believe AWS will also gain as corporations change their technology foundations—and you should—then who cares whether the third-quarter operating profit margin is 5% or 2%?

No large technology company has more balls in the air than Amazon. It is spending billions of dollars on the following: its own shipping and delivery operations; online video programming, including airing football games; expansion into India; speedy delivery services such as Prime Now; physical convenience stores and bookstores; its line of home speakers and virtual helpers; and its own line of products such as coffee and laundry detergent. I got exhausted just typing that list of Amazon activities. At most companies this sprawl would be idiotic.

But Amazon is Amazon because it breaks all the rules. Amazon is everywhere and doing everything in violation of the business axiom that a company should concentrate on one or two areas that it does best. Embrace it. It’s good. Being a rebel works for Amazon. Wall Street just needs to learn how to better predict this rebel. Bloomberg

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