Amazon Miss Sparks Debate: Will Video Pay Off Like Cloud Computing?

Source – investors.com

Amazon.com‘s (AMZN) surprise second-quarter earnings miss has analysts debating the margin impact of its far-flung investments, and while cloud computing seems a good bet to pay off, internet video may be raising some eyebrows. 

Autoplay: On | OffThe difference: Amazon Web Services is by far the biggest provider of cloud computing services, leading Microsoft (MSFT), Google-parent Alphabet (GOOGL) and others.

In web video, Amazon aims to catch up with Netflix (NFLX), Google’s YouTube, Time Warner‘s (TWX) HBO and others. Amazon has stepped up investments in original content and has expanded video streaming services overseas.

Shares in the e-commerce giant were down 2.5% to 1,020.04 on the stock market today after Amazon’s revenue topped views, but profit fell far short of estimates. That’s off intraday lows of 1,001 and above Amazon’s recent buy point of 1,016.60.

Michael Olson, analyst at Piper Jaffray, maintains an overweight rating on Amazon stock.

“An irony in the Amazon margin story is that we don’t believe investors would disagree with any of the initiatives to which Amazon is committing significant capex or opex dollars,” he said in a note to clients.

At Stifel, analysts Scott Devitt isn’t sure about that.

“Amazon is spending aggressively on everything under the sun,” Devitt said in a report. “It may all work but it is clear that investment levels will be heightened in the near term. The most recent investment cycle created a buying opportunity once certain investments received reduced allocations based on limited success, China and mobile phone. We see a lot of positive in this cycle but note two areas that could eventually be viewed as problematic by investors: video and various new retail initiatives such as grocery.”

The e-commerce giant views internet video as a recruitment tool for its customer-loyalty program, Amazon Prime. The subscription service, which costs $99 annually, has 80 million U.S. members. Prime encourages shoppers to buy more goods, with free delivery and other perks.

“Amazon strongly believes that its video content offerings efficiently enable conversion of customers into paid Prime subscribers and lead to greater spend per subscriber,” said Mark Mahaney, a RBC Capital analyst in a report.

Aside from cloud computing and online video, Amazon’s other big investments include retail grocery, fulfillment-center buildouts, engineering staff and salespeople, artificial intelligence and overseas markets like India. “The fulfillment and AWS waves may dissipate, but the video investment seems early,” said Michael Graham, a Canaccord Genuity analyst in a report.