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Amazon investment pays off

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Amazon logo2If you have ever been the director of a publicly quoted company (as I both have been on many occasions and still am) then you will know the pressures of the problem of having to produce ever improving short term results whilst making the right long term investment decisions. Private firms like TechMarketView can say “we will sacrifice our profits this year to invest in new products and services that will reap rewards in the years to come”. Much more difficult when you are public.

This is a dilemma for many companies – from Saleforce.com to Facebook. But it has been Amazon where the dilemma is, perhaps, most acute. See my post Amazon pays the price for playing it long. Last night’s reaction to Amazon’s Q1 figures was a joy to anyone who is against the short termism of the market. Amazon reported forecast-beating sales growth of 34% to $13.4b whereas profits fell 35% (to $130m) as it continued to invest in its distribution network, datacentres and in establishing its Kindle product range (some models of which many believe Amazon are currently selling at a loss). However, just as Tim Cook said that iPad sales were ‘on fire’, it looks like the Amazon Fire sales were…”on fire” too. This $199 device is the strongest competitor that the iPad has and, I believe, was the reason why Apple decided to retain the iPad2 in its range as its own low cost tablet competitor. Kindle is vital in the major switch Amazon is seeing from physical to digital media (mainly book) sales. It anticipated this switch and invested accordingly. This long term investment decision really seems to be paying off.

What analysts liked was the increase in its gross margin from 21% to 24%– which gives an excellent pointer to whether Amazon can make real money out of the model when the investment cycle completes.

Amazon shares were up nearly 14% in after hours trading.

Note- I am a long term Amazon shareholder.


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