Amazon’s end of year performance is not the most impressive of the trillion dollar club to which it belongs. A low sales forecast and rising costs look alarming in the midst of a broad tech sector sell-off. Yet shares beat Big Tech peers to rise 15 per cent in after-hours trading.
Like a Dutch bridge dismantled to accommodate Jeff Bezos’ mega-yacht, markets bend to Amazon’s will. There may be a post-pandemic slowdown in online store sales but the company’s strength lies in its diversification. Unlike Meta or Alphabet, which are heavily reliant on one sector, Amazon’s business also encompasses huge cloud computing and advertising operations. Combined, these account for a fifth of sales. Advertising profits are not split out but AWS, which has a 30 per cent operating margin, supports Amazon’s expensive obsession with ever-faster ecommerce delivery times.
Investors were primed for downbeat news. The $4bn rise in operating costs due to inflation was not a surprise. Higher costs are likely to continue into 2022. The company has doubled its headcount in the past two years to 1.6m. Wages are rising, pushed higher by labour shortages. Net income was expected to fall but was saved by a near $12bn pre-tax gain in Amazon’s investment in newly listed electric vehicle maker Rivian. However, the stock now trades nearly a quarter below its initial public offering price.
Still, Amazon’s investments in its own business are far more palatable than Meta’s far-flung attempt to build the metaverse. Adding facilities and staff means extra capacity, faster delivery times and more incentive for Prime membership extras, which include free delivery.
Raising the price of that membership by $20 per year for an estimated 150m US subscribers should add about $3bn to annual sales, so long as subscribers do not quit. The increase is equal to less than 1 per cent of sales last year. It will serve as a test of Prime’s popularity.
In markets, Amazon is winning its own popularity contest. In spite of Meta’s fall, Big Tech’s earnings season has ended on a positive note.