Amazon gazumped Wall Street last night by making a surprise profit of $92m (£59.3m) for the quarter to June 30. Analysts had expected a modest loss, following a $126m shortfall in the same period last year. As they started scratching their heads and shrugging repeatedly, the news caused an after-hours trading frenzy among investors, pushing the share price up 17%.
A curious thing happened as a result. With a market capitalisation now approaching $267bn, Amazon became, for the time being at least, more valuable than retail behemoth Wal-Mart. Hold on, I hear you ask. Didn’t Wal-Mart top Fortune’s list of the world’s biggest companies only the day before?
The discrepancy is of course because Fortune lists firms by revenues rather than market cap (by which measure Apple is the most valuable). So it would cost you more to buy Amazon, but Wal-Mart still far exceeds it in its takings.
Last year, Wal-Mart had eye-watering sales of $485.6bn and profits of $16.4bn, dwarfing Amazon’s $241m loss off $89bn revenues. The tech firm’s big, but there are clearly different levels of giant.
The reason that Amazon is more valuable despite being much smaller and far, far less profitable, is that it is growing at around 20% a year and doesn’t look like stopping any time soon, while Wal-Mart has far less room to expand. The expectation is that Amazon will make big profits at some point in the future.
Don’t be fooled into thinking this is the beginning of Amazon’s era of profitability, however. It makes a modest profit or loss in most quarters - this isn't really anything to write home about. It's largely the result of keeping costs under control – operating expenses grew by 17.4% against a 19.9% rise in revenues – but it won’t last. Amazon’s own forecast for the next quarter is somewhere between a loss of $480m and a profit of $70m (talk about hedging your bets).
Besides, $92m profit still looks pretty meagre next to $23.2bn revenues. That’s 0.4% of its sales actually converting to profit. Compare that miniscule margin with the average for the Fortune Global 500. Between them, the world’s best, including Amazon and Wall-Mart, took in $31.2tn and made a profit of $1.7tn, or 5.4%.
When Amazon starts going billions in the black, then we can talk about a new era. Given that it faces a fundamental trade-off between profits and growth, boss Jeff Bezos remains highly unlikely to change course – there are too many challengers out there for him to key his eye of his world domination prize (Alibaba, anyone?).
What we can expect perhaps is a steady rise in profits if Amazon Web Services, its dominant cloud computing division, continues to grow at 81% a year. It now produces 8% of Amazon’s revenues, and is a more inherently profitable business.
Ultimately, whether Amazon is a better long term prospect than Wal-Mart remains to be seen. The rise of online retail has done little to thwart the giant discounter (think Aldi and Lidl times a thousand), which continues to return staggering numbers.
With nearly half a trillion dollars in revenues and 2.2 million employees – approaching the adult population of Wales – Wal-Mart will take some beating if Amazon or anyone else wants to assume the retail world’s top spot.