How Come Amazon Suddenly Reported Record Earnings Instead of Reinvesting All Its Profits ?

Something is stirring in Seattle. As the following article explains, for two decades Amazon disdained Wall Street's insatiable demand for profit growth in order to reinvest in its business.

Recently, though, the company has reported record profits. Much of this comes from its merchant cloud services, the business of leasing space and associated emoluments in its world-beating AWS (Amazon Web Services) cloud subsidiary. And it may just be that this is truly the future, avoiding the messy and relatively expensive interaction with evermore demanding customers.

But given the company's legacy in consumer-driven sales and its noted will to dominate, it may just be that Amazon is showing some financial muscle to keep the Wall Street activist wolves at bay while it prepares for the next phase of reinvestment in its campaign for global commercial omnipotence. JL

Marcel Weiss reports in Early Moves:

It is rather strange that, all of a sudden, Amazon starts reporting (growing) profits for four consecutive quarters, when the last 20 years were all about meticulously re-investing all profits to grow a large online retail business as fast as possible. It helps that AWS is providing staggeringly high growth in revenue and profit. (But) Amazon is preparing the company’s shareholders for a long period of very capital intensive investments in global logistics.
GeekWire on Amazon’s earnings:

Asked about the company potentially dialing down big investments as its profits grow, [Amazon CFO Brian Olsavsky] noted that “I wouldn’t say that.” He pointed to investments in new content for TV shows and movies, adding to the Prime video catalog.
“We can tell it’s working and we see that investment going up,” Olsavsky said of the company’s video offering. “We will significantly increase content spend.”

Investment into video content is strategically very important. Exclusive content drives video streaming consumption. Which in turn drives adoption of Amazon Prime. But calling even a significant increase in content spend a big investment for a company the size of Amazon is ludicrous. (For context: Netflix is spending $5 billion per year on exclusive content. That is at the very high end.)
Amazon’s stock is up more than 35 percent compared to last year and rose 12 percent after the recent earnings report which saw Amazon with $513 million in profit in Q1/16.
This is helpful for employee retention as Amazon is heavily using share options for rewarding long term employees – and is battling high turnover.
But is that all there is to such a fundamental change of heart at Amazon?

It is rather strange that, all of a sudden, Amazon starts reporting (growing) profits for four consecutive quarters, when the last 20 years were all about meticulously re-investing all profits to grow a large online retail business as fast as possible.
It helps that AWS is providing staggeringly high growth in revenue and profit.

But still, why?
Here’s my guess: Amazon is preparing the company’s shareholders and the general public for a very long period of very capital intensive investments.
Maybe the company will add another quarter or two of showing off increasing profits. Right until the guidance from the company, accompanied by more news on Amazon’s immediate plans, point to a large, capex intensive endeavour. I doubt this point is far off in the future as Amazon’s plan has already ‘leaked’.
Amazon needs to show that the “turn the profits on” switch is still working perfectly fine.
What might Amazon the public and investors be preparing for, you may ask.
What could be so large and capital intensive that Amazon felt the need to show for at least a year that the company can make profits before it goes into a, potentially decade-long, period of re-investing every single penny and maybe even starts borrowing larger amounts of cash?
The answer is building up a global logistics infrastructure, of course.