Amazon reported quarterly results last night that, in the words of one news outlet, stunned Wall Street. What was so stunning about Amazon’s results? The company reported a 15% increase in revenue, but that isn’t so stunning. Wall Street analysts were expecting about $22 billion in revenue and that’s what Amazon reported.
Did Amazon finally turn a profit on their billions in sales? Nope, that wasn’t it either. On $22 billion in revenue, Amazon lost $57 million in the first quarter. Hardly stunning.
Maybe it was cash flow. Amazon did report a nice jump in free cash flow (cash flow minus capital spending). Free cash flow for the twelve months ending March 31 was $3.16 billion compared to $1.49 billion last year. That’s a nice jump, but it hardly justifies the $35 billion jump in market value today. With a $208 billion market value, Amazon is trading at 66X free cash flow. So it probably wasn’t cash flow that stunned Wall Street.
The most likely candidate is Amazon’s Web Services business. For the first time, Amazon broke out the results of its Web Services business, which is the company’s cloud offering. According to CEO Jeff Bezos, Amazon Web Services is a $5 billion business that is growing fast. In the first quarter Web Services generated $1.5 billion in revenue, a 50% increase from the first quarter of last year. Operating income was $265 million.
Sounds like a decent business and it probably is, but the size of Amazon’s cloud offering isn’t nearly as stunning as just how little profit the rest of Amazon’s business makes. Web Services accounted for 6.9% of revenue in the first quarter and over 100% of operating income.
That’s truly stunning and not in a good way.
Jeremy Jones, CFA
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