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Amazon’s secret weapon remains its cloud services

Amazon’s secret weapon remains its cloud services


Wall Street is an insatiable beast

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Amazon, once a company with a volatile profit capacity, has started stabilizing its money-making activity in recent years. It’s shown investors that it can turn out huge gains when it wants to, due to its more capable logistics network, Prime subscription service, cloud computing efforts, and growing family of Kindle and Echo devices. This past quarter, unfortunately, was the company’s first disappointment in quite some time. The culprit appears to be Amazon's retail operating expenses, which swallowed almost the entirety of its income.

The company reported its third quarter earnings for fiscal 2016 today, posting a profit of $252 million, or 59 cents a share, on revenue of $32.7 billion. While both those figures are way up from last year — with sales up 29 percent and income more than tripling — the profit figure came in far below analyst expectations of 79 cents a share. Amazon’s stock is now down nearly 5 percent in after-hours trading.

Amazon Web Services continues to outshine retail quarter after quarter

As per usual, Amazon Web Services, the company’s cloud computing division and its fastest growing profit driver, was the company's saving grace. The division, which rents out server capacity and hosts online operations for companies small and large, earned $3.2 billion, $861 million of which was profit. That’s the third straight quarter AWS earned more than Amazon’s entire North American retail division. In fact, AWS more than tripled Amazon’s retail profits this past quarter.

Of course, this is a classic case with Amazon, as well as many other forward-looking tech companies that routinely run the gamut of Wall Street expectations. The company is clearly growing in key areas — Prime, cloud services, devices — but it occasionally suffers lower-than-expected growth in divisions with more razor-thin margins, like retail. So when those departments under-perform, for any multitude of reasons, it could force Amazon's stock to take a hit. The company also refuses to acknowledge sales in key areas like Echo and Kindle, while keeping Prime highlights to a minimum. So Amazon shoulders some blame for keeping certain figures under wraps.

At the end of the day, the company has a lot cooking. There's drone delivery, a whole Alexa-focused vision for the smart home, a whole bunch of media services you can subscribe to, and a neat Prime membership layer overlaying all of it. These are all benefits not easily quantifiable every quarter of every year. So for now, it's "maybe next time" from Amazon to investors.