Amazon’s Profit Falls Sharply as Company Buys Growth

Jeff Bezos, Amazon’s founder, in Washington last month. On Thursday, the company reported quarterly sales that exceeded analysts’ forecasts, but less profit than they expected.
Jeff Bezos, Amazon’s founder, in Washington last month. On Thursday, the company reported quarterly sales that exceeded analysts’ forecasts, but less profit than they expected.Credit...Emma Howells for The New York Times

SEATTLE — Amazon is back in the business of buying growth.

The company has been investing heavily to keep its giant core businesses growing at the expense of profits. For its retail business, that means spending to ship items to customers in just one day, an expensive proposition that the company said had already kicked up more sales.

“They are leaning into shipping because that is a lever that has worked for them in the past,” said Sucharita Kodali, an analyst at Forrester Research.

On Thursday, the company reported that it had $70 billion in sales in the latest quarter, up 24 percent from a year earlier, and $2.1 billion in profit, down 28 percent. Amazon had more sales but made less profit than analysts expected. It was the first year-over-year decline in profit since the middle of 2017.

Shares fell about 8 percent in after-hours trading. Shares of Twitter also fell Thursday, about 20 percent, as its earnings fell short of Wall Street expectations.

For Amazon’s cloud computing services, the company is spending to hire for sales and marketing, the types of work that Jeff Bezos, its founder, long eschewed but that have become necessary as Amazon looks to sign up bigger legacy businesses.

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The number of individual products that Amazon sells is a key measure of its retail business, and unit growth had started slowing about two years ago. In April, Amazon announced that it was moving to make one-day shipping the default for its Prime members, a way to lift growth again.

Brian Olsavsky, the company’s finance chief, said the offering had increased sales to Prime customers. “They are buying more often, and they are buying more products,” he said.

Amazon expects to spend about $1.5 billion for one-day delivery during this quarter, which includes the holiday season, Mr. Olsavsky said. That includes costs for faster shipping as well as other expenses, like the lost revenue from customers who used to pay extra to get something in one day.

The one-day offering lets Amazon get a bigger piece of consumers’ wallets on products typically bought at grocery stores or pharmacies. A typical order for items shipped in two days or more is $23.33, and Amazon spends $5.08 to fulfill and ship the items, according to a Morgan Stanley analysis. But for one-day shipping, the typical order is $8.32, and Amazon spends $10.59 to fulfill and ship it, meaning it loses money on many sales.

Ms. Kodali, the Forrester analyst, pointed out that Amazon had said it would spend $800 million in the first quarter of one-day shipping and that it later said the cost would be even higher.

“For what? Is that necessary?” she asked. “Who needs Cheetos that fast?”

As Amazon has shown before, consumers nonetheless respond. In the latest quarter, unit sales were up 22 percent, more than twice the growth rate at the start of the year, before the one-day shipping initiative began.

Amazon Web Services has been the leader in cloud computing, an approach to storing, computing and using data that the company pioneered. AWS grew with early, tech-forward adopters like Netflix and start-ups. Increasingly, Amazon is going after large corporations, which have far more complex processes to transform how they buy and use technology. This month, Amazon publicly celebrated as its own retail operations finally migrated off Oracle’s databases, a not-so-subtle sign that large and complex organizations can operate on AWS.

But Amazon faces growing competition, particularly from Microsoft, whose cloud products are catching up and benefit from Microsoft’s decades of experience specializing in selling to large companies.

“We are in a period where we are investing heavily in AWS,” Mr. Olsavsky said. The costs include a bigger sales force “to service a larger customer base,” the addition of new products and features, and an expansion to new geographical areas.

“Most enterprise work flows have yet to move to the cloud, so there is still much adoption to come,” he said.

AWS had about $9 billion in sales in the quarter, up 35 percent, its slowest growth rate yet. Its operating margin fell to 25 percent.

The growth of AWS is key to Amazon, in part because it is so much more profitable than the retail business. Even though AWS generates less than 15 percent of sales, it is the most valuable part of Amazon, according to analysts.

The research firm Morningstar wrote last month that AWS was worth $550 billion. “This would make AWS the fourth-most-valuable company in the world, trailing only Microsoft, Apple and Alphabet, and ahead of other tech giants like Facebook and Alibaba,” the research note said.

And Amazon has expanded the more profitable parts of its retail business. More than half the products sold on are from third-party sellers, for which Amazon takes a cut without the risk of buying and pricing products.

Amazon’s “Other” business segment, which it says is largely ads, had almost $3.6 billion in sales in the most recent quarter, up 45 percent. The ads are believed to be highly profitable, and give the company money to plow into other investments, like the one-day shipping.

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A version of this article appears in print on , Section B, Page 3 of the New York edition with the headline: Amazon Buys Growth, and Profits Take a Hit. Order Reprints | Today’s Paper | Subscribe