Imagine this scenario: Amazon posts a $286 million operating loss for the third quarter, its sixth losing quarter in 2.5 years. Frustrated investors call for CEO Jeff Bezos’ head and punish the company’s stock. Amazon defends its long-term strategy but acknowledges that it’s still investing significantly to expand its business, sacrificing short-term profits.
It might sound far-fetched, but that could have been the reality — if not for Amazon Web Services.
In the actual results last week, Amazon posted $575 million in operating income for the third quarter, with help from $861 million in operating income from Amazon Web Services. The cloud-computing division’s $3.2 billion in revenue accounted for nearly 10 percent of Amazon’s companywide revenue of $32.7 billion. AWS’s operating income was 150 percent of Amazon’s operating income as a whole, helping offset a $541 million operating loss in the company’s international segment.
As it happened, investors weren’t happy with the actual results, which missed Wall Street’s expectations.
But without AWS’s extra financial push, the company overall would have posted a $286 million operating loss, rather than a $575 million operating profit, and would have seen quarterly revenue of just $29.5 billion compared to actual revenue of $32.7 billion.
The difference illustrates just how much the online retailer has come to depend on Amazon Web Services to fuel the rest of its sprawling business and feed its global ambitions. It’s impossible to say how Amazon would be managing its expenses and profit margins if it hadn’t launched AWS more than a decade ago. But it’s clear that AWS has emerged as a huge economic engine.
The impact was particularly clear in the third quarter, as illustrated in the chart above, showing the massive swing from operating profit to loss when the cloud computing division’s results are removed. But it’s not the first time AWS has kept its parent company profitable.
AWS has been consistently profitable since at least 1Q14, the first period for which Amazon has provided AWS numbers. Its profits stood in contrast to operating losses by its parent company in two consecutive quarters (2Q14 and 3Q14,) and AWS has kept the company in the black for four additional quarters since 1Q14.
Unlike AWS, Azure is “hugely unprofitable” for Microsoft, in the opinion of Deutsche Bank analyst Karl Keirstead, as reported by Business Insider. True, the reporting segment encompassing Azure, called Intelligent Cloud, posted operating income of $2.1 billion in Microsoft’s FY17Q1 ended Sept. 30. But shoveled into that segment are also SQL Server, Windows Server and Visual Studio, as well as support and consulting services. Those inclusions obscure whether Azure on its own is profitable.
AWS’s continued strong sales have made an understatement out of CEO Jeff Bezos’ April prediction that the service will deliver $10 billion in sales this year. AWS could easily achieve over $12 billion in revenue this year. Over the past three quarters, AWS has generated $8.68 billion in revenue, averaging an increase of 10.4 percent each quarter. If that average holds in the current quarter, AWS will generate 4Q16 revenue of $3.55 billion, bringing its 2016 total net sales to $12.24 billion.
Amazon shares lost about 6 percent of their value after Thursday’s earnings release, falling to $777.25 from $818.25, but were beginning to climb again today, trading Monday morning at around $787. A number of financial analysts shrugged off the company’s poor earnings, noting that Amazon has always put growth ahead of profits. No analysts downgraded the stock after the earnings release, according to Yahoo Finance.