Why Amazon’s stock is really flying. (Hint: It’s not the cloud.)
Amazon’s (AMZN) stock price is shooting up on Friday to an all-time high, gaining 15% and adding over $25 billion to the company’s market cap.
While most of the headlines about Amazon’s first-quarter earnings focused on the company’s first revelations of revenue at its cloud unit, known as Amazon Web Services, the real reason for the stock’s surge has much more to do with another, unrelated factor.
The real shocker in Thursday night’s Amazon earnings report was the company’s guidance about its second quarter profitability. Last year, Amazon reported a $15 million loss in operating income for the second quarter and analysts expected about the same for this year — and at a time that’s typically weak for retailers.
But on Thursday, Amazon said it would report operating income of $100 million to $650 million excluding stock compensation for this year’s second quarter, much more than analysts anticipated. Canaccord Genuity analyst Michael Graham called it “the most optimistic margin guidance in recent memory.”
And that gets investors excited because every few years, Amazon eases up a bit on its invest-everything-for-growth strategy and demonstrates just how profitable it can be. After the new second-quarter forecast, investors seem to believe 2015 will be a “show me the money” kind of year.
The long-running debate over Amazon as an investment, of course, revolves around the company’s ability — or lack thereof — to show profits. Bezos & Co. say they are re-investing what would otherwise be sizable profits back into the business to fuel further growth. But bears on the stock say that’s just a cover story for an unsustainable business model that’s little more than selling dollar bills for 95 cents a piece. A year of real profits would help quell those concerns.
On Friday, Raymond James analyst Aaron Kessler and Janney Montgomery Scott analyst Shawn Milne upgraded their ratings on Amazon and both cited the improved profitability outlook. Milne noted that the unusual $170 million write-off Amazon took for its failed Fire Phone last year had also depressed margins, a blunder he didn’t expect to see again this year.
Of course, it also helped that Amazon’s first-quarter results were better than Wall Street expected and the new disclosure about the cloud business showed a $5 billion annual run rate and an operating profit of $265 million in the quarter. The cloud sales were about as expected. The profits were a surprise.
Overall, Amazon reported first quarter revenue of $22.7 billion, up 15% from last year and ahead of analysts’ estimates of $22.4 billion according to FactSet. Revenue would have increased 22% if not for the strength of the U.S. dollar against other currencies, Amazon said. The company lost $57 million, or 12 cents per share in the quarter, also better than the 14 cent loss analysts expected.
In mid-morning trading, Amazon’s shares hit a high of $452.65, up 15% from Thursday’s close before the earnings came out and a new all-time high for the stock. The share have gained an impressive 44% so far this year.