Buffett in Awe of Bezos' Genius

05/03/2016 9:47 am EST


Michael Berger

President & Founder, Technical420.com

After Amazon reported first quarter earnings that exceeded Wall Street expectations, the shares have rallied more than 13%; Michael Berger, Associate Editor of MoneyShow.com, discusses some of the recent developments and explains why the company’s results were received so well.

Amazon.com, Inc. (AMZN) has had a great couple of days after the leading online retailer wowed Wall Street with its first quarter earnings that blew away expectations.

Following the strong earnings report, Amazon has received a wave of upgrades from Wall Street, compliments from Warren Buffett, and has seen its share price rally more than 13%.

More than Twenty Firms Raised its Price Target

After Amazon crushed its first quarter revenue and profit expectations, more than twenty Wall Street banks increased its price target on AMZN. Several of the leading Wall Street research firms announced changes to estimates:

  • JP Morgan raised its price target to $915
  • Goldman Sachs raised its price target to $800
  • Deutsche Bank raised its price target to $900
  • Credit Suisse raised its price target to $880
  • Oppenheimer raised its price target to $780
  • Raymond James raised its price target to $770

Beat and Raise

During the first quarter, Amazon generated $1.66 billion in operating income on $29.1 billion in revenue. The Street expected approximately $1.1 billion on $27.97 billion in revenue.
Amazon not only handily beat first quarter expectations but the online retailer also guided higher for the second quarter. Amazon said it expects revenue of $28-30.5 billion and operating income of $1.2-1.8 billion. The Street was expecting $27.7 billion in revenue and operating income of $1.5 billion.

Amazon Web Services (AWS) has become the go-to for most businesses, so it’s not surprising that segment continues to grow steadily. The company is posting huge year-over-year growth, meaning that demand is still increasing, despite competition from Google and Microsoft.

More and more, it looks like AWS is going to be a huge second line of business for the company, especially if it continues to grow at this rate. For the trailing twelve months, it’s about a $9 billion business.

AWS is a Profit Machine
Amazon Web Services (AWS) was a major contributor to the strong quarter and is the most profitable business at Amazon. During the quarter, AWS generated more operating income than Amazon's entire e-commerce business (domestic).

Although AWS generated less than 10% of Amazon’s total revenue, it accounted for 56% of its profit. Revenues at AWS climbed 64% while operating income more than tripled to $604 million.

Some research firms said AWS owns more than 30% of the cloud-computing market and it remains far ahead of rivals including Microsoft (MSFT) and Google (GOOG).

Amazon Ships 5400% More Tablets

Although Amazon does not break out the earnings for its hardware products, the Kindle Fire was a big contributor to overall sales growth.

The number of tablets shipped by Amazon during the first quarter increased by 5421.7% when compared to the same period last year.

AWS may have been the focal point in the first quarter earnings report but hardware sales were also a major bright spot of the report.

Buffett Compliments CEO Jeff Bezos

You know you are doing well when Warren Buffett, Berkshire Hathaway's chairman and CEO, says that he is in awe of your genius.

On CNBC’s Squawk Box, the oracle of Omaha said, “We haven't seen many businessmen like him. Overwhelmingly, he's taken things you and I've been buying and he's figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that's remarkable.”

Buffett also went on to say that it would be a bad idea to try and take on CEO Bezos at his own game.

Buffett said, “That would be like me playing chess with Bobby Fischer 40 years ago; it would be all over on the first move. Jeff has just shown an amazing talent in figuring out how to please customers.”

Margin Expansion Story is Back on Track

While Amazon’s most recent quarter was highlighted by accelerating revenue growth, its margin expansion story appears to be back on track after it reported weaker-than-expected fourth quarter results.

We remain favorable on shares given our expectation for continued e-commerce market share gains, meaningful long-term margin expansion, and the company’s leadership position in web services.    

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