Amazon’s Surprise Q2 Profit: It’s All About The Cloud

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From my Forbes.com blog:

A business once derided as a risky distraction suddenly helped add a stunning $40 billion to Amazon.com’s market value today.

And in a stark sign of how e-commerce has upended the retail business, Amazon is now worth more than Wal-Mart Stores. No doubt Sam Walton is twitching in his grave.

In its second quarter reported today, Amazon said its Amazon Web Services cloud computing business saw revenues jump 81%, to $1.8 billion. But even that wasn’t the biggest surprise for investors, who bid up Amazon’s shares by about 17% in extended trading after a 1.5% decline in today’s regular trading.

Even though cloud services constitute less than 8% of overall sales, which include product sales and other service revenues such as fulfillment for other retailers, AWS earned $391 million in operating profit. That’s well over half the $684 million operating profit from Amazon’s worldwide product sales of $21.4 billion–nearly five times the revenue level of AWS.

In other words, the onetime distraction’s operating margin is north of four times that of Amazon’s original business. At this rate, investors may soon need to rethink what Amazon’s core business actually is.

It’s yet another sign that CEO Jeff Bezos’ risky bet has paid off bigtime. It took many years, but it’s clear that Bezos saw something his critics didn’t. “What we’ve historically seen is that the seeds we plant can take anywhere from three, five, seven years,” he told me way back in late 2006.We think it’s going to be a very meaningful business for us one day.”

That day, it seems, has finally arrived.