Amazon Is Overshadowing IBM

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon.com’s (NASDAQ: AMZN) quarter was fairly successful in terms of revenue growth and improvements in cash flow (improving cash flow was the biggest highlight). Investors have been investing aggressively into the stock because of the revenue growth the company has been able to exhibit in both foreign and domestic markets.

In the most recent quarter, Amazon was able to grow its revenue from $13.2 billion to $16.1 billion; that growth along with operating cash flow growth of 39% are what led investors to bid up the price of the stock post-earnings.

Earnings highlights

The company expects an extremely broad range for the second quarter. The second quarter is seasonally slow (trough period). Amazon expects that revenue will grow 26% year-over-year. This performance  is extremely important as investors are buying the stock based on the merits of incremental revenue growth.

Amazon essentially reported the same income before income taxes year-over-year. With 2013 income before income taxes at $81 million and in 2012 income before income taxes at $84 million, the company’s management team throws caution to the wind as it is extremely focused on growing the top-line with total ignorance and dis-interest to the bottom line performance.

The company grew its operating cash flows from approximately $3 billion to about $4.3 billion. This implies that the company has been able to increase the total amount of revenue generated from its online retail activities. The operating cash gives information on total cash brought in, but excludes cash spent on long-term investment activities.

Amazon has increased the purchase of property and equipment by 114% year-over-year. Amazon’s web-services division is its service suite for cloud needs. Amazon’s aggressive investment into the cloud is driven by the need to open and operate data-centers. Data-center related costs include buildings, security personnel, property, servers, technicians, etc.

Amazon’s retail business is also expanding domestically and internationally. Amazon has invested aggressively into product warehouses and fulfillment centers. The growth in capital expenditures is an alarming statistic for competitors in the cloud space more so than the retail space.

As retailers are getting KO’d by Amazon’s outrageously low prices, the cloud is a heavily contested space. AT&T anticipates that the cloud will become a $210 billion industry by 2017. Competition is getting fierce in the cloud, and Amazon is putting up more money than many others in the space.

Landscape is definitely changing

International Business Machines (NYSE: IBM) is being demolished on the server side of its hardware business. The cloud allows companies to have access to servers and software through an Internet connection, and with faster Internet (Google Fiber, Verizon FiOS) coming to the mix, the costs and benefits continue to improve. Since Internet speeds continue to get faster, the need for dedicated servers has fallen.

Dedicated servers will remain a market segment as banks can’t afford to lose sensitive data. Biotechnology firms must protect research and data from the outside world. Other companies such as brick-and-mortar retailers, front-facing websites, construction firms etc. can rely more heavily upon the cloud, and cloud software services.

IBM’s systems and technology reported a 17% decline in revenue. The decline in revenue was somewhat offset by the 70% growth in the cloud division but unfortunately not completely. 

Revenue declined in the period by 17.2%. The CEO, heavily dissatisfied with the results from systems and technology, announced that IBM would more aggressively cut costs and focus heavily on customer service and retention.

Overall, IBM’s competitive position in the cloud should be questioned as Amazon has increased its investment into cloud-related infrastructure by 100% year-over-year. IBM shareholders have to be cautious of Amazon's web services as Amazon is a well-respected brand in the space. Amazon will throw piles of money in order to win a competitive advantage, and for the most part it is working.

Netflix (NASDAQ: NFLX) shouldn’t feel that threatened by Amazon Prime. As Amazon Prime is more of a service that Amazon uses in order to win cross-selling business into its other retail products and services, it’s not very appealing to major film companies like Walt Disney, and Time Warner, which have opted to sign exclusive content rights over to Netflix because the online streaming company is completely dedicated to entertaining its audience. Amazon, on the other hand, is offering up movie streaming in order to drum up business for its retail division.

Amazon has been able to acquire content for its prime instant video with a licensing agreement with A+E networks, CBS corporation, FX, PBS distribution and Scripps networks interactive. These companies are focused on creating TV series. Amazon’s success in collecting low-quality content shouldn’t faze Netflix, or its investors.

In fact, it only establishes Netflix’s dominance in movie streaming as it was able to sign on with Walt Disney and Time Warner. As a result, Netflix is going to have movie titles like, Thor: The Dark World, Godzilla, The Hobbit, Star wars Episode 9 and 10, 300: Rise of an Empire (can’t wait to see this one), Monster University, Tron 3, and etc. So basically, Netflix’s market position is solid if not made of titanium going forward.

Buying Netflix is like buying into the belief that Walt Disney and Time Warner will continue to make excellent movies, which without a doubt I believe will come true. Netflix will ramp up production of its own TV series as its recent success with the House of Cards clearly proves that it isn’t as reliant on film producers as it seems.

Amazon’s international strategy is skewed

Amazon’s earnings were more or less a success. Its aggressive investment into cloud services is starting to show fruition as the online retailer is able to compete head-to-head with major players like IBM. Some 10 years ago, I doubt anyone would have thought this online retail company would ever be toe-to-toe with big blue.

The international roll-out of Amazon retail is being met with difficulty in Europe. European sales are sagging as international revenue growth was 16%, compared to North American revenue growth of 31%. The revenue growth in North America was partially driven by Amazon Web Services, which proves how much of a success Amazon may become in the cloud space.

Amazon investors are seeing hits and misses all over the place with its segment diversification. The company’s growth in the international markets is likely to continue. Amazon web services is a gigantic smash hit as it is causing IBM to walk lopsided for a couple quarters. Perhaps Amazon’s video-streaming service at best is just another content store that’s unlikely to generate any substantial revenue, but it at least improves cross-selling activity or at least that’s what Jeff Bezos believes it does.

Conclusion

Ultimately analysts on a consensus basis believe that Amazon will be able to sustain earnings growth of 37.7% over the next five-years. With its recent success in cloud, domestic strength in online retail, along with international growth, investors should remain excited.


Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, International Business Machines., and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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