Amazon gets analyst thumbs up on investment plans

Dive Brief:

Amazon’s plans to “continue to invest heavily,” Chief Financial Officer Brian Olsavsky told analysts during a conference call on Thursday, detailing a push for 18 new fulfillment centers in the third quarter of 2013 and a doubling of its investment in video services.
Amazon on Thursday reported second quarter 2016 net sales of $30.4 billion, up 31% from $23.2 billion in the second quarter of 2015—the online retail giant’s fifth consecutive quarter in the black, and its third all-time profit milestone in as many quarters.
Analysts have been sanguine about Amazon’s long-term outlook, with some, like those at Macquarie, suggesting that Amazon is positioned to have its best Q4 ever, according to MarketWatch. But analysts also noted concerns about increased spending and a Q3 operating margin guidance that is “weaker than expected.”

Dive Insight:

The short-term pressure on public companies—the expectation for evidence of growth at every quarter—can stymie the kind of vision companies need to continue to innovate and grow. Retailers are increasingly faced with changing customer priorities, tech-enabled capabilities and expectations about ordering across channels and speedy delivery—significant market forces that take vision and investments to take on.

Many turn to cost-cutting to protect their investors, and in many cases fail to take the long view.

“We’re seduced by this notion if I’m an investor and I'm not getting double digits I’m not happy. When did 5% growth become a bad thing?," retail futurist Doug Stephens, author of "The Retail Revival: Re-Imagining Business for the New Age of Consumerism" and the Retail Prophet blog, told Retail Dive last year. "It’s greed on the part of markets and the companies, and leads smart people away from making good decisions.”

Amazon, with a few instances when its investors did get a bit impatient, has largely escaped that pressure, and has been able to plow much of its revenue back into making the company more technologically and operationally robust. Olsavsky told analysts on Thursday that the company is expanding fulfillment centers in Q3, after launching just six in the same period last year.

“So, why are we expanding so much?” he said. “If you remember back to Q4 and the capacity constraints we had in Q4, primarily due to really strong FBA growth, we talked a lot in the Q4 call about the operational cost of that in Q4. Customers [were] well taken care of, but we had additional fulfillment costs from being so tight on capacity.”

Amazon will also double its investment rate in Prime Video streaming in the second half of the year and triple the number of Amazon Originals productions, Olsavsky said, explaining that the service boosts renewal rates after free trials of Prime membership. Analysts like where the company is going, and are mostly on board with the investments Amazon says it’ll take to get there, though there’s some concern about margins.

“Amazon is growing units faster, gaining market share at an increasing rate, with higher profit margins and increasing investments in long-term opportunities including fulfillment, media, logistics and PrimeNow,” Piper Jaffray analysts wrote. “The long-term growth outlook is upbeat, as Amazon slowly takes away traditional retail’s last competitive advantage—instant gratification—and rides the Amazon Web Services cloud secular growth theme.”