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Apple Poses Threats For Amazon on Multiple Flanks

Posted on Monday, Feb 8th 2016

After four consecutive quarters of good results, analysts sent Amazon’s (Nasdaq: AMZN) stock down in the dumps. Last week, the company reported disappointing results for the quarter and the outlook wasn’t impressive either.

Amazon’s Financials

Amazon’s fourth quarter revenues grew 22% over the year to $35.7 billion, compared with the market’s expectations of $35.9 billion. EPS of $1 was also short of the Street’s forecast of $1.55 per share.

By segment, net product sales increased 15% to $26.62 billion and net services sales grew 47% to $9.13 billion.

Amazon ended the year with net sales growing 20% to $107 billion and net income increasing 140% to $1.25 per diluted share. This was a milestone year as Amazon crossed the $100 billion revenue run rate for the year.

For the current quarter, Amazon projected revenues of $26.5 billion-$29 billion with an operating income of $100 million-$700 million. The Street was looking for revenues of $27.7 billion with an operating income of $665 million.

Amazon’s Physical Retail Push

In a surprising move, Amazon appears to be expanding its physical retail presence now. Last November, the company opened its first retail bookstore in Seattle. The store has successfully integrated several online and offline capabilities. For instance, customers can scan shelf tags to get the price of merchandise in the store and Amazon is also able to associate in-store shoppers with their online profile. The integration could allow for upselling, cross-selling, improved service delivery, and potentially personalized pricing. As of now, the store sells books and Amazon’s Kindle and Fire devices and Amazon plans the inventory using data it collects from its website. Goods are priced at Amazon’s online price and the store showcases customers’ online book reviews and curated sections.

Market rumors now suggest that Amazon may be looking to open 300-400 stores. Amazon hasn’t commented on the plan, but if it were true, it is a surprising move for a company that has been focused on taking retail online.

Amazon’s Cloud Growth

Meanwhile, Amazon continues to invest in its cloud business. For the recently reported quarter, Amazon’s Amazon Web Services (AWS) revenues grew 69% over the year to $2.4 billion. The segment’s operating margins tripled to $687 million. During the year, Amazon added more than 720 features to the cloud. Last year, it also introduced Aurora, a relational dataset that is able to provide improved performance and cost efficiency than MySQL while ensuring data consistency and integrity.

During the quarter, AWS announced the general availability of Amazon WorkMail, an enterprise focused offering that will offer a secure email and calendaring service along with support for existing desktop and mobile email clients. It also announced the availability of AWS IoT, a managed cloud platform that will enable connected devices to securely interact with cloud applications and other devices. To strengthen security capabilities, AWS released AWS Certificate Manager (ACM) that will allow customers to provision, manage, and deploy Secure Sockets Layer/Transport Layer Security certificates for use with AWS services free of charge. It also released EC2 Scheduled Reserved Instances that will enable customers to reserve capacity for applications that run on a part-time, recurring basis with a daily, weekly, or monthly schedule over the course of a one-year term.

But there is worry for the cloud business as well. There is increasing concern that competitors like Microsoft are growing fast. Additionally, Amazon’s big customers like Apple may be looking at alternate solutions. Recent reports suggest that Apple is building nearly 2,500 thousand square feet of data center space and could end up withdrawing some of its spend from AWS when these data centers come up. Analysts estimate that even if half of what Apple spends with Amazon were to go away, Amazon would be looking at a $600 million reduction in revenue.

Amazon’s Digital Growth Plans

Additionally, Amazon has been investing in other digital growth paths as well. Last quarter, it announced the availability of devices with Amazon Dash Replenishment Service. Certain models of washing machines and printers from Brother, GE, and Gmate will now be able to automatically order replacement cartridges and detergents. Other brands such as Purell and Whirlpool are also joining this service.

Amazon continued to grow its digital content as well. Last quarter, the Amazon Original Series The Man in The High Castle became the most watched series on Prime Video and received outstanding critical acclaim from USA Today. Similar positive reviews were also awarded to the second season of Transparent and its first Original Movie Chi-Raq. Amazon also launched the Streaming Partners Program that will allow Prime members to add streaming subscription program from SHOWTIME, STARZ, and other such media providers to their subscription. One of the big drawbacks of Amazon Prime is that it is unavailable on the AppleTV. Apple is also starting to ruin the user experience of the Kindle App on the iPhone and iPad.

Besides video streaming, music streaming is also seeing strong growth. Last quarter, Prime Music streaming hours tripled in the US. Amazon launched the music service in Germany and Japan and now provides Prime members with access to a library of over a million songs.

Analysts weren’t happy with Amazon’s results and the stock fell 14% post announcement of the results. It is currently trading at $502.13 with a market capitalization of $236.4 billion. It touched a record high of $696.44 at the end of last year.

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