Here's why Amazon made so much money last quarter

Published Fri, Apr 29 20162:41 PM EDTUpdated Fri, Apr 29 20162:41 PM EDT

Breakingviews

Amazon has laid its tech credentials on the table. The internet company's 28 percent first-quarter sales increase is impressive, but more still are its prodigious and growing earnings from selling digital services. Amazon's lowly margin remains a long way from justifying its $280 billion valuation, but it is finally looking less like a retailer. Skeptics have long questioned whether selling books, gadgets and pet supplies online meant Amazon was merely a retailer in a shiny new coat with a penchant for expansion. Its low margins and continued feeble profitability fed such concerns. These are mere semantics to Amazon. But its Web Services (AWS) division has become, almost by accident, a useful rebuttal. The company got into the business in part because it had excess infrastructure. Selling that and the digital expertise it developed for its retail operations to the likes of Netflix and other companies provided a nice additional source of funds. More from Breakingviews : Comcast's $3.8 bln Shrek deal needs some make-up This tail is now wagging the dog. AWS had sales of $2.6 billion in the three months to March, an increase of 64 percent on the same period last year. Its bumper 28 percent operating margin yielded operating income of more than $700 million. That beats the rest of Amazon's operations combined - and the fast growth and profitability put to bed the lingering question of whether Amazon is limited to being the new Wal-Mart Stores. Investors have cottoned on, sending the stock up 12 percent after the market closed. That would push Amazon's market valuation above $300 billion. How big web services will be is unclear. So too is whether the company will continue to dominate the business and whether it can improve the company's overall net margin beyond the lowly 2 percent level last quarter. For now, though Amazon and its investors are betting the company will be the digital backbone of the economy. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

Jeff Bezos

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