One-Hour Prime Delivery Is Why Amazon Doesn't Need to Make Money Now

The company's earnings dropped in the past quarter, but that's not the point.

Getty Images / Drew Angerer

If you live in New York, Chicago, London, or one of 47 other cities worldwide, Amazon can deliver orders in as little as an hour. It’s a hell of a deal for those who have access to the Prime Now and are willing to pay the $7.99 delivery fee, but it’s not necessarily a good deal for Amazon itself — at least, not yet.

“That is a service customers love,” chief financial officer Brian Olsavsky said on Amazon’s second quarter earnings call Thursday. “That is not an inexpensive service, though.”

Prime Now is the perfect illustration of the company’s overarching approach since Jeff Bezos founded it 23 years ago. Amazon is prepared to bankroll costly but popular services and figure out how to make them turn a profit later. The company emphasizes its focus on customer satisfaction and investment in long-term growth, sometimes at the expense of short-term earnings.

That’s the story coming out of Amazon’s second quarter earnings call, as the company shared with investors and the public its performance from April to June of this year. Amazon’s earnings were considerably below analyst projections, but this is more an indication of the company’s long-term priorities than it is necessarily a cause for concern.

Amazon’s net sales, a solid indicator of how popular the company’s products and services are with consumers, were $38 billion this quarter. This represents a 25 percent increase from the $30.4 billion in sales from the second quarter of 2016. It’s also up from the $35.3 billion in sales for the first three months of 2017. The company has exceeded analyst projections for both of this year’s quarters — Amazon was expected to reach $37.18 billion in sales for this quarter.

This revenue, however, considers only what Amazon brings in from its myriad products and services. Its overall earnings, on the other hand, look at the full picture of the company’s financial transactions, which in Amazon’s case involve major investments that trade short-term earnings for potential long-term growth. Those costly investments include things like video, drone delivery, and international expansion.

Analysts had already figured Amazon’s earnings would drop this quarter, assuming a drop of 21 percent to $1.41 per share. The actual numbers are significantly lower, with the per-share earnings actually coming in at 40 cents. The company’s net income in the second quarter was $197 million, less than a fourth of its $857 million income in the same three-month period last year.

Amazon Web Services, the company’s cloud computing platform, remains its most reliable moneymaker. Its income in the past quarter was $916 million, compared with $436 million for Amazon’s operations in North America. Its ongoing international expansion operated at a loss of $724 million. The continued financial success of AWS is part of the reason Jeff Bezos is able to continue his strategy of more adventurous investment in the future, even when parts of the company lose money in a given quarter.

As for the next quarter, Amazon projects net sales to increase to between $39.25 billion and $41.75 billion, which would be a growth of between 20 and 28 percent from the third quarter last year. Its income is projected anywhere from a loss of $400 million or a profit of $300 million. Even the most optimistic projection is barely half the company’s $575 million profit it posted in the third quarter of 2016. This means the company plans to continue to prioritize future-looking investment, at least in the near term.

One of those investments remains Prime Now, which Olsavsky said is something the company looks to improve. “We’re constantly working on our cost of delivery and our route densities,” he said on the call. “We like what we see and we’ll continue to expand that. We’ll be working very hard making that not only a valuable Prime offering and Prime benefit but also a lower-cost operation as well.”

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