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Being Jeff Bezos means never apologising about profits

Amazon has a reputation for spending as much money as it can get its hands on, and that reputation is deserved. The company has poured money into building up its e-commerce business in India and other international markets, cloud-computing and other businesses.

business Updated: Apr 27, 2018 11:48 IST
Shira Ovide
Shira Ovide
Bloomberg
Amazon,Amazon Inc,Amazon Q1 results
Bezos is closely watched in Silicon Valley for his business savvy. In subtly changing his company into a beast with improved economic fundamentals, he’s found another way to have the last (famously cackling) laugh.(REUTERS)

It is awesome to be Jeff Bezos.

The Amazon.com Inc. CEO is the world’s richest person. He has a meme-worthy physique. And investors love him when he shows them the tiniest bit of profit love.

Amazon on Thursday reported a dinky 3.8% operating profit margin on more than $51 billion in sales. It was the highest operating profit margin since the middle of 2016, but it’s still laughably small compared with a company like Facebook and its 45% margins. Amazon also projected second-quarter operating profit that was higher than most Wall Street forecasts.

Amazon shares had already climbed more than 67% in the last year, and they shot up about 6% in after-hours trading on Thursday. Yup, Being Bezos is pretty grand.

Amazon has a reputation for spending as much money as it can get its hands on, and that reputation is deserved. The company has poured money into building up its e-commerce business in India and other international markets, its cloud-computing business, its Echo line of voice-activated gadgets, programming for its web video service and its packing, sorting and shipping logistics.

That is quite a list of spending priorities, and it shows in Amazon’s results. The company’s core operating expenses -- excluding its cost of sales covering items like payments for products that Amazon sells online -- is consistently growing faster than Amazon’s rapidly growing revenue. Revenue in Amazon’s first quarter rose 43% from a year ago, which didn’t include sales from the Whole Foods supermarket chain. Amazon’s core operating costs climbed even faster at nearly 50%. This cost line has been inching up gradually, and the increase in the first quarter was the fastest rate since at least 2012.

What has changed, however, is that Amazon is becoming a fundamentally more profitable company. I know that’s a weird sentence to read about a company with less than 4% operating profit margins. But what I mean is that Amazon’s gross profit margin -- its revenue minus basic costs to purchase products, buy packing supplies and grab digital video programming -- is growing. Gross margin was nearly 40% in the first quarter compared with consistent margins in the 30% range for several years.

The growing gross margins are great news for Amazon investors who have long been starved for profits. As Amazon expands its sales from cloud computing, digital advertising, Prime subscriptions and the middleman fees from merchandise sold by independent companies, it is getting a bigger share of sales from naturally higher margin businesses than Amazon’s original identity as an online store. (Another boon to Amazon’s gross profit margin: The company said on a conference call with stock analysts that it plans to increase the annual fee for Prime membership to $119 from $99. Amazon already generates about $11 billion in yearly revenue from Prime fees and other Amazon subscriptions like those for Audible.)

Amazon has also been squeezing the companies whose goods are sold on its virtual mall, which gives Amazon better economics. And no doubt as Amazon grows as huge as Bezos’s biceps, it’s figuring out how to squeeze more efficiencies as it flings packages around the world.

The end result is Amazon can, if it curtails its investment spending, become a fundamentally more profitable company than it was in the days when it bought merchandise and resold it at a markup.

Macquarie Capital’s Benjamin Schachter pointed out this week that Amazon in this way is the flip side of Google parent company Alphabet Inc. Google started out in the highly profitable digital advertising business. Almost anything else that Alphabet does -- making gadgets for the home, offering cable TV-like subscriptions online and selling cloud computing to businesses -- may come at lower profit margins.

Amazon is the reverse. Its core e-commerce business has posted such low margins -- in many cases by Amazon’s design, it should be said -- that almost anything new that Amazon does will have higher margins. That includes its cloud computing business and making gadgets for the home, the same businesses that are dragging down Alphabet’s profit margins.

Bezos is closely watched in Silicon Valley for his business savvy. In subtly changing his company into a beast with improved economic fundamentals, he’s found another way to have the last (famously cackling) laugh. Bloomberg Gadfly

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

First Published: Apr 27, 2018 11:42 IST