Amazon posts surprise profits

  • Amazon wowed Wall Street Thursday with a report of $25.36 billion in revenue, sailing past the $24.91 billion in revenue expected by analysts from Thomson Reuters. The e-retail giant made $79 million in Q3, 17 cents per share, compared to an expected loss of 13 cents per share. Shares surged 10% in after-hours trading on the news.
  • Analysts had been expecting Amazon to improve by posting a smaller loss year over year, and its share price soared on the profit performance. There are other signs that Amazon is doing well, including its announcement this week that it would hire many more holiday workers this year, bucking the trend among other retailers that are keeping holiday steady with last year.
  • Amazon’s Q3 results continued the pattern of the company benefiting greatly from its AWS cloud services, which had operating income of $521 million, five times what it was in Q3 2014.
  • Amazon is finally demonstrating what its patient investors have been waiting for: a pattern of consistent growth and profit.
  • The stock rise is a vote of confidence in Amazon’s potential. There are a few essential reasons for that potential, but two basic ones are: the strength of its cloud computing business and the vast potential of global e-commerce. That market totaled $1.32 trillion last year, according to eMarketer, with 21% growth yet this year and more expected in the future.
  • Amazon’s tilt toward innovation has helped keep its investors patient. Even when it sees failures, like its ill-fated Fire phone, the company pivots without becoming tech or innovation-shy.
  • It’s hard not to compare Amazon’s fortunes to those of Wal-Mart, which by contrast in recent weeks has seen its stock tumble amid concerns that it will take more work and money to clean up its inventory, stores, and e-commerce than it can handle or that may be possible to jump-start growth.
  • Others have noted that an improving economy has both workers and customers leaving Wal-Mart for better jobs or more enticing retail environments.
  • Meanwhile some analysts have pointed out that because Wal-Mart is such a huge company it could have reached a sort of plateau—while there are profits to be had, growth is a tall order.
  • While a down economy may help make Wal-Mart’s customers sticky, that may fizzle somewhat, while Amazon has its benefit-laden Prime program, whose less-fickle members have now become nearly half of its U.S. customer base. Prime members spend $1,200 there each year on average, while non-Prime customers spend $700, and Amazon has been working hard — throwing a Prime Day sale mid-summer amid other ways to sign up new trial memberships — to collect new ones.
  • “Amazon is a virtual marketplace that’s kind of like an infinite shopping mall — you can get with one click anything you want to buy,” Columbia University business school professor of retail studies Mark Cohen told Retail Dive earlier this year. “It’s an organization that almost never screws anything up. … And when they do, within two minutes on the phone they apologize and make it about as easy as you can get to make it right.”
  • But Amazon’s reliance on its cloud-computing business could eventually face stiff competition. Microsoft Thursday alsoreported big gains in its cloud-computing business, and Wal-Mart took aim at Amazon last week with its announcement that its technology arm, WalmartLabs, will soon open its OneOps cloud-storage solution to the public, making it easier to move data between cloud systems.

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Alphabet (formerly Google) beats on earnings, thanks to mobile search and programmatic advertisement growth

Dive Brief:

  • Google parent company Alphabet, Inc. posted strong third-quarter earnings on Thursday that beat analyst expectations and sent the company’s shares to record highs in extended trading.
  • Driven by strong growth in mobile search and programmatic ads, overall Q3 revenue for the company rose 13% over the same period last year. Google also reported that the overall number of paid clicks rose 23%, but cost-per-click fell 11% for the quarter.
  • During an earnings call with analysts, Google CEO Sundar Pichai told investors he was confident in Google’s ability to deliver ads to people at relevant moments, adding that he anticipates mobile search ads might become “as compelling or even better than desktop.”

Dive Insight:

“Our value proposition to markets of all sizes is simple,” Google’s Pichai said on the earnings call. “Google can help you show the right ads to the right people at the right moment.”

The main takeaways from Alphabet’s earnings report are clear: Google’s bread and butter — search ads — are proving effective on mobile.

However, analysts have been worried of late that the unintended consequence of mobile growth is a decline in cost-per-click, which fell 11% this quarter. It looks like those worries may have misplaced, as CFO Ruth Porat attributed the drop in cost-per-click to the growth of YouTube TrueView ads, Google’s skippable pre-roll ad offering.

Porat noted during the call that both TrueView ads and Google Preferred, which allows brands to buy ads on top YouTube channels, have seen significant growth. Pichai called video “a profound media shift” and said that advertisers have been very responsive. “We are getting great traction there…[as brands are] moving traditional budgets to YouTube,” he said.

Programmatic ads are an area of growth for Google that is “on fire,” according to Pichai. Programmatic ad revenue has nearly doubled in the past year, with 80% of the top 100 advertisers buying ads programmatically from Google.

One more thing to note for marketers is that Google says it isn’t worried about ad blocking, though it did acknowledge that, as an industry, they need to work on poor ad experiences.

The better-than-expected earnings come at a time of transition for the Internet behemoth, which is going through a restructuring under the newly created holding company Alphabet. All the core Internet businesses — search, advertising, maps, YouTube and Android — will remain part of Google under the new company structure.

“They’re in a great position in the overall advertising space, whether it’s search, display or mobile. They’ve got the right program to continue to grow at a solid pace and be dominant in those spaces,” Kerry Rice, a Needham & Co analyst, told Reuters.

This quarter marks the first earnings report for the new Alphabet parent company and the last before the Internet businesses start reporting separately under Google.

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