Amazon is on a streak, with four consecutive quarters posting a profit.
For investors in Amazon, who have become accustomed to the company’s focus on revenue and user growth instead of on the bottom line, the newfound profits are a novelty.
Here’s how Amazon’s three main businesses compare in terms of operating margins, including stock-based compensation:
- North America: 3.5%
- International: (1.3%)
- AWS: 23.5%
In other words, Amazon’s AWS cloud computing business is very different in terms of profit potential versus its traditional bare-bones-margin e-commerce business. The AWS cloud business posted operating income of $604 million on revenue of $2.6 billion in the first quarter.
What’s really striking though is that Amazon nearly doubled AWS’s operating margin year-over-year. AWS’s margin went from 12.5% in Q1 of 2015 to 23.5%.
The improvement is basically the payoff from heavy datacenter investment in 2015 and early 2015, says Mizuho analyst Neil Doshi.
“They started to get more scale, and more efficiency throughout the business, and that’s what you’re seeing in the margins,” says Doshi.
Heavy lifting costs are done
Amazon is planning to ramp up five new AWS zones this year, which means that spending should pick up again, but Doshi describes the spending as “incremental,” rather than “heavy lifting costs.”
The big spending going forward is likely to be in other areas, as Amazon builds out its global network of warehouse distribution centres and creates its own transportation network, including leasing aeroplanes. And Amazon warned on Thursday’s earnings call that video would also be a major investment thrust this year.
But even as Amazon ramps up its spending on these initiatives, Doshi thinks the company may be showing a new side to investors.
“It seems like we’re seeing a new Amazon that’s kind of more focused on revenue growth but also decent margin expansion,” he said.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
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