Dominating e-commerce comes at a price for Amazon

SEATTLE • Amazon.com has reminded investors that luring shoppers away from stores and dominating the cloud-computing industry is not cheap.

The company on Thursday forecast a potential quarterly loss for the first time in two years. It said it is spending more on new warehouses to meet e-commerce demand, data centres for its Amazon Web Services division, video programming, and gadgets like the Echo line of voice-activated speakers to stay on the cutting edge of the smart-home market.

The outlook underscored the high cost of Amazon's business model, which delivers big sales gains and ploughs a chunk of that money back into the company by hiring workers, expanding its footprint and launching new products.

Chief financial officer Brian Olsavsky said Amazon's expenses would climb in the second half of the year as it hires workers and works out the kinks in new warehouses to prepare for the peak shopping season. That is why it has projected operating income in the current period, ranging from a loss of US$400 million (S$544 million) to a gain of US$300 million. The last projected quarterly loss came in July 2015 for similar reasons.

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The third quarter "is generally a high investment period for the holiday", he said.

Analysts estimated operating profit of US$863.5 million, and shares fell as much as 4.3 per cent to US$1,001.80 in extended trading on Thursday after the forecast and earnings were reported. Amazon's stock has risen 39 per cent this year, and earlier on Thursday chief executive officer Jeff Bezos briefly surpassed Microsoft co-founder Bill Gates to be the world's wealthiest person, before falling back to the No. 2 spot as Amazon's shares declined.

Investors have put increasing faith in Mr Bezos to keep Amazon growing by entering new categories such as groceries and appliances and expanding abroad. The company just opened in Singapore and is moving into India and Australia. Amazon hired more than 30,000 new employees "in the last few months", Mr Bezos said.

Second-quarter sales gained 25 per cent to US$38 billion, topping analysts' projections of US$37.2 billion, according to data compiled by Bloomberg. Net income fell to US$197 million, from US$857 million a year earlier.

Net sales in the third quarter will be US$39.25 billion to US$41.75 billion - growth of 20 per cent to 28 per cent from a year earlier. The forecast excludes Amazon's proposed US$13.7 billion deal for Whole Foods Market, where the company is betting it can replicate its online selling success.

Amazon dominates e-commerce in the United States with its US$99-a-year Amazon Prime subscription. The company had 85 million Prime subscribers in the US as of June 30, up 35 per cent from a year earlier, according to Consumer Intelligence Research Partners. Amazon's subscription services revenue, which is mostly from Prime memberships, rose 51 per cent to US$2.17 billion in the second quarter - faster than 49 per cent in the previous quarter. The company does not disclose the number of Prime subscribers.

Revenue from Amazon Web Services, its profitable cloud-computing division, rose 42 per cent to US$4.1 billion.

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A version of this article appeared in the print edition of The Straits Times on July 29, 2017, with the headline 'Dominating e-commerce comes at a price for Amazon'. Print Edition | Subscribe